Curve

Affordable homeownership: possible even in pricey places

Peter Warden
The Mortgage Reports contributor

How to own a home for less per month than you ever thought possible

Owning a home can be affordable even in expensive areas. It may not be easy, especially if you’re just starting out or have expenses like student loans. But you have more options than you know. Check out these 5 secrets to affordable homeownership and achieve your dream  — wherever you live.

Find affordable mortgage programs and rates here (Feb 16th, 2019)

“Affordable homeownership.” Not an oxymoron

“Affordable homeownership.” Those are two words that rarely sit comfortably together, at least for those who are yet to buy a property.

And things have recently gotten worse. In its U.S. Home Affordability Report for the last quarter of 2018, ATTOM Data Solutions found that housing nationwide was less affordable then than at any point in more than a decade.

Hope ahead

However, there’s some hope on the horizon. The Realtor.com website quoted ATTOM vice president Daren Blomquist’s predictions for 2019: “We’re going to hit an affordability tipping point in 2019, where it becomes more affordable to buy,” he said. “Buyers will have more inventory to choose from and they will be running against fewer multiple-offer situations.”

And it’s certainly true that 2019 kicked off with reports suggesting that inflation in home prices is slowing — though those prices are still rising. Meanwhile, by the start of 2019, mortgage rates had fallen back from their 2018 highs.

Still, many wannabe first-time buyers find the financial obstacles to their dream daunting at best — impossible at worst. But is that because they haven’t thought sufficiently laterally?

1. Think multifamily

When you can’t afford the typical home in your chosen neighborhood, you may be thinking too small. Instead, try a bigger home designed for two (duplex), three (tri-plex) or four (four-plex) families.

Typically, in this scenario, you live in one unit and rent out the other(s) to tenants. Indeed, in some circumstances, it may be possible to cover your entire mortgage payment from rental income.

Self-supporting purchases

And that may apply in areas where housing is expensive as well as those where it’s cheap. That’s because high prices in a home purchase market are often reflected in local rents, too. How’s that for a shortcut to affordable homeownership?

Of course, you’ll need to research your local housing markets to see whether your plans might be financially self-sustaining. And you need to look at many figures when you’re doing your math.

Related: Tips for landlords (How to set your rent)

Demands and costs of being a landlord

That’s because the extent to which your purchase may be self-sustaining will partly depend on how much time and effort you’re prepared to invest in being a landlord. And, if you lack the skills and personality to do much of the work yourself, you’ll have to pay others to do it for you.

Do you have a sufficiently forceful personality to collect rents and ensure tenants behave considerately and legally? Can you fix a leaking faucet or broken power outlet? Are you willing to clear a blocked toilet? Will you do routine maintenance and carry out repairs yourself? Are you comfortable with all the admin and paperwork being a landlord brings?

If you answer No to some or all those, you need to build into your calculations the sums you’ll have to pay professionals for such tasks.

Financing for multi-unit homes

By now you’re probably wondering about getting a mortgage big enough to buy a multi-unit home. Well, there’s good news. Because the Federal Housing Administration (FHA) backs loans tailored for such purchases. And they come with higher borrowing caps the more units you’re buying.

As importantly, FHA loans are available with a down payment of as little as 3.5 percent, which can be a gift from a family member. Better yet, you don’t need a great credit score to qualify. However, you’ll struggle if you’ve had recent credit issues. VA loans (mostly for veterans and servicemembers) can deliver even sweeter deals, with zero-percent down payments but generally lower borrowing caps.

How much you’ll be able to borrow will depend on home prices where you want to buy. For caps on FHA and VA loans for multi-unit homes that will apply to you, check out your zip code using our lookup tool.

Of course, other lenders also provide mortgages for such properties. And they can often offer cheaper deals overall. However, they (including “conforming” mortgages from Fannie Mae and Freddie Mac) tend to be much more picky about the people to whom they’ll lend for multi-unit housing. And they’ll likely want a much bigger down payment.

2. Bargain basement

Another route to affordable homeownership can come with buying a standard house with rentable space. Of course, that could involve you renting your spare bedrooms to roomers. But that involves a loss of privacy. And you’ll need an unusually tolerant mindset.

So, most often, such spaces are finished basements, guest cottages in the yard or so-called in-law apartments. Ideally, you want any of these to have its own access to the outside. Because you’ll be back to having privacy issues if your tenants have to traipse through your home to get to theirs. Obviously, they’ll need their own kitchens and bathrooms.

Of course, homes with any such amenities tend to be more highly priced than the same property without them. But, if you tot up the additional cost per square foot of extra living space, they are often amazing bargains. You might even call the extra you pay a bargain basement price.

Practical issues

Renting out a self-contained part of your house is different both legally and practically from taking in roomies. To start with, you’ll be in a landlord/tenant arrangement and will need a lease. Many suggest from bitter experience that you should, at least to start with, make that a month-to-month rental agreement. Sign a year-long lease, and it could take you a long time to get rid of someone troublesome.

You’ll be governed by federal, state and local laws for landlords. So get up to speed with those — and make sure you’re not breaching any homeowners’ association rules. Oh, and don’t forget to let your insurer know.

Financing

Renting out a self-contained space will turn your home from a single-family unit into a duplex. So you’re eligible for the same FHA and VA (and other) loans as someone buying more mainstream multi-family units.

If you can afford it, you can probably buy the house as an ordinary home with a standard mortgage and choose to rent out the space later.  You should model both scenarios by getting mortgage quotes for each.

Verify your new rate (Feb 16th, 2019)

3. Container homes

You can shift gear in your quest for affordable homeownership by changing your expectations for your home. Forget the mainstream and think even further outside the box.

Steel yourself …

Or, perhaps, inside a particular type of box. Because container homes are precisely what they sound like: homes made from those big, steel shipping containers you see everywhere.

Buy one, and you end up with a “cozy” 100 square feet. But configure eight together and your new home can be a positively spacious 1,400 square feet.

Pros and cons

The primary advantage of a container home is its cheapness. But it’s amazing how far a little imagination (or a willingness to steal others’ ideas) can take you in creating an unusual and desirable home.

However, the downsides are considerable. If you want more than one story, expect to have to reinforce the in-between floors because container roofs are not strong.

You’ll also likely need to add insulation because steel’s lousy at keeping out the cold or heat. And you need to be aware of health hazards. Used containers might have previously carried literally anything. And they may have been manufactured with treatments and paints that are unsuitable for domestic environments.

Finally, you’re unlikely to get a mainstream mortgage on a container home. So you’ll have to use your savings and a personal loan (and/or credit cards) to buy or build one.

4. Tiny homes

Tiny homes are a hot trend. Some define them as houses having a floor area smaller than 400 square feet.

You can see their appeal. Many are undeniably beautiful. And they provide a lifestyle that’s generally more planet-friendly, affordable and sustainable than most mainstream homes.

Financing a tiny home

It would be an exaggeration to suggest that many mortgage lenders welcome applications for tiny homes. Many still say no automatically.

But attitudes are slowly changing and it may be worth hunting around for a willing lender. Still, for now, you should probably expect to finance yours in the same way as a container home.

5. Buy with a co-borrower

Affordable homeownership may be within your grasp if you’re able to buy a property with a friend or family member. You can pool your savings toward a down payment. And both your incomes will count when your lender calculates your borrowing limits. You can probably buy a nicer home more quickly than if you go it alone.

There are two main caveats:

  1. You and your co-borrower need similar credit scores — Your lender will count the poorer one, which can lead to resentment if one’s great and the other’s bad
  2. You need to agree on an exit plan upfront — What happens if you fall out, or if one of you marries or gets a job far away?

You see? Affordable homeownership needn’t be a contradiction in terms. But, to achieve it, you may have to move a little way from the mainstream dream.

Verify your new rate (Feb 16th, 2019)