The fourth quarter is upon us, and as planned out in January, we are in the final stages of looking for a new home.
After weighing the pros and cons of condos earlier this year, we opted to focus exclusively on single-family homes. (Yes, I still owe you guys a pros and cons list of buying single-family.)
The local market gives us a handful of apparent options:
- Buy a lot and build new.
- Buy new construction.
- Buy existing-owner or bank-owned homes in a standard sale.
- Buy a short sale property.
- Buy from HomePath.
The last option is something I stumbled across years ago during our first attempt at home ownership, but the inventory was thin and the deals were far better elsewhere.
With the recent success of another family member using HomePath to buy their first home, I wanted to give this a second look.
The Other Options
Generally speaking, the cost per square foot of a new home on an existing lot is greater than the budget we’re shopping in, and that doesn’t even account for buying the lot–easily another $100,000 cost in some local areas.
New construction carries a similar dilemma, with lower-priced properties either prohibitively outside of town, or way out of our price range. The local market builds mostly for moderately to very wealthy second-home buyers, and we are neither.
Buying an existing house is the best option for us, though traditional financing falls short in today’s market. Many banks are requiring 10 to 20% down, and while that may be the “ideal” financial move, we don’t want to let opportunities pass by simply for the sake or putting more money into the house.
As a result, the FHA-loan route is the one we want to take. Rates on FHA loans are actually independent of the rates on privately funded mortgages, something I didn’t know until very recently. For a while, FHA loans were more expensive than traditional loans, but more recently, they are actually outperforming standard rates.
Of course, beyond the rate considerations, an FHA loan typically only requires a 3.5% down payment with other provisions that make it easier to come up with the money (e.g. you can use gifts for at least some of this money).
Looking into HomePath
HomePath properties are Fannie-Mae owned homes that are put on the market via this special program. There are a handful of big advantages to HomePath beyond the FHA loan:
- HomePath loans require only a 3% down payment.
- HomePath loans DO NOT require mortgage insurance.
- Appraisals of the home are not required.
- Many homes are also eligible for a HomePath renovation mortgage (essentially a cheap loan to improve the property).
Mortgage insurance can easily run $100-$200 or more per month, hitting your bottom line and also eroding your ability to qualify for higher-priced homes. This is a big benefit and one that is making me seriously consider HomePath.
HomePath is also realizing that quality sells, and many of their newest homes are “improved properties.” They basically renovate the entire home from outside to inside to make it more appealing to buyers.
Finally, all new properties go through what is called a “first look” period, where only buyers who will live in the property can bid on the house for the first 15 days. This eliminates investor buying, which is a big cause of good local inventory being largely unavailable to buyers who need financing.
The Buying Experience
Second-hand information tells me that the buying experience is generally painless. You can usually work with your existing bank to obtain the mortgage, except the bank works the loan through the special program set up for this purpose.
The only shortfall is inventory–it is limited, and the good homes can go under contract within a matter of days. As we gear up to start making offers, it will be critical to move quickly on anything we like.
As far as buying houses goes, this is a non-traditional route that offers a unique way to get your first property. Then again, I’m no stranger to non-traditional routes (e.g. Hertz Rent2Buy for my car 2 years ago).
I’ll keep you posted! Things are finally getting exciting.