First-time Home Buyer in Austin, TX

[samn]

Hi MMM friends,

I'm a single 31 y/o looking to purchase a SFH as a primary residence + house hack in Austin, TX. I've lived here for 9 yrs and plan to stay long term - my work is split 50/50 between being virtual and location specific.

I am SE and earn 52k/yr gross. I work part time hours (~20hrs/wk @ $50/hr) and spend the other time developing skills to expand my business into new areas in the coming years. I currently turn down new clients/work in lieu of maintaining flexibility and free time in my schedule to develop said skills.

Quick rundown:

• Credit 805
• DTI 7% (student loan balance of 5k - no other debt)
• Cash 42k
• Trade-specific assets 30k
• Investments 25k

My goal is to purchase a 3/2 SFH home for 250-300k using a 3% down conventional loan and to rent out the master BR/BA (I need 2nd BR for home office). I currently rent a SFH with a roommate for 1700/mo. Rents in my area are 1800-1900/mo. I am not looking to cash flow. I want to lock in my housing expense, avoid the uncertainty/instability of renting (landlord is selling the house I live in) and put down roots in the ever-increasing expensive city that I love and want to live in for years to come.

I realize that my situation is much less appealing to a lender than that of a high income-earning individual with less variables. I took a hit in revenue (along with the rest of the world…) in 2020, but things are back on track with Q1 of 2019.

Am I foolish to try this?
Should I pay off debt (5k in student loans) in order to maximize lending potential?
Have you presented a signed lease agreement with a renter to a lender? Lawyer friend told me that some may take into account 75% of rents collected.

I just need some advice and thoughts on the situation. Thanks for taking the time to read.

[Mini-Mer]

The Austin-area housing market is an extreme sellers' market right now.  Housing stock is very low - you will not find many houses available at any one time, and they disappear quickly.  Successful offers are well over list price, with protections for the buyers (like the appraisal contingency) limited.  Sellers are also looking at (or guessing at) the strength of potential buyers' finances as a factor in which offer to accept.

There's no harm in seeing what kind of mortgage you'd get approved for, or in watching real estate listings in your price range.  I would not personally jump in now as a first-time buyer.  Prices may not go down much, but a buyer's market would give you more options for location and condition, more time to think before making an offer, and a better position for negotiating terms.

Another thing to consider - you mention valuing flexibility and free time.  MMV, but in my opinion owning a house is basically a major hobby: expensive, time-consuming, or both.  And a lot of houses in your price range (which is similar to mine) will be older and due for work.  There is something to be said for letting the old roof, HVAC, furnace, appliances, etc. be someone else's problem.

[MrDelane]

Mini-Mer brings up a lot of good points.  Just for context, I just did a quick search for 3/2 SFH currently on the market with a maximum price of 300K and only 9 properties came up within the city limits.  If you're interested in going out to Pflugerville, Manor, Round Rock or Hutto then additional options start cropping up. 

I'm not saying it's not possible (and like Mini-Mer said, there is no harm in seeing what you would be approved for) - but trying to buy a 300K 3/2 home within the city right now is not going to give you much to choose from.  That may not be a reason not to do it, but just make sure you know what you're getting into.  With few options available you may have to be more flexible on what you get or what you spend.... alternatively, if you are not in a hurry, then there is no harm in waiting it out.  We took over 8 months before buying our home back when the market was insane in 2006 (and had to get really used to moving quickly and eventually being outbid and outspent on multiple properties).

And take it from someone who replaced windows and siding two years ago, an HVAC system last year and is currently vetting Roofers.... there is definitely something to be said letting those things be someone elses problem.

Edited to add:
I'm assuming you know this, but just in case, the Austin home market is currently at record breaking median prices

[samn]

Thanks Mini-Mer and MrDelane. Yes, I am well aware that Austin is an extreme seller's market right now and I am looking at Pflugerville/RR/Cedar Park/other surrounding areas.

I don't mind buying an "ugly" house in a good neighborhood - something outdated that needs a little TLC. I can do flooring, painting, and other basic reno work. However, I agree wholeheartedly that it is a major relief to leave the major systems (HVAC, roof, appliances, etc) to someone else.

I understand the value in waiting. I am not in a rush (current lease is up in 10 months but will move elsewhere month-to-month) and I expect difficulty in getting approved for that amount (rejected by several lenders already). My concern is that I will eventually get priced out of this city with the current Apple/Tesla/etc developments and the projected population increase.

Should I consider taking a 10k loan from a friend or getting a relative to cosign in order to increase my financial position when applying for a mortgage? I expect business revenues to increase to 85k/yr+ in the coming years. I realize those options risky.

[GoCubsGo]

I don't think your foolish, but I think your dreaming a bit based on what you've laid out.

Lenders won't look at rental income in most cases, underwriters want clean deals (even a personal loan might get flagged when they audit your bank account deposits).  In my area, sellers are seriously vetting the multiple offers most homes get and financial strength of buyer is a huge factor.  FHA loans are one more additional hassle most sellers in a hot market won't want to deal with.  I can't imagine you winning a bid with 3% down unless it's a home no one else wants.  If your area is as hot as mine, "fixer uppers" don't even make it to the market and are bought pre-listing by one of the dozens of cash rich, deal hungry investors flying around like vultures.

Long story short, you either have to wait (your numbers are shaky to me personally) or start making a lot more money as most of your competition will likely be in a stronger financial position than you are.  If you think the market will continue to appreciate, that's even more incentive to work like crazy to build up financial strength.

[Dicey]

I'm a complete real estate geek with many years experience.  I had to Google FTHB. What the fuck? Too hard to say the actual words?

Now get off my lawn!

[ChpBstrd]

The 250-ish range isn't crazy. I believe the old rule was to spend 3x your income on housing, but thanks to low interest rates you should be able to afford this. And if not, work more.

You'll almost certainly qualify for a mortgage. Consider bumping up your work schedule for a couple of months to make your income look better and qualify for a better rate. Remember to save up about $5k for closing and moving expenses, and look at what liabilities you might still have from your current lease.

Be mentally prepared for such a house to lose $100k in value if mortgage interest rates double in the next few years.

[samn]

@GoCubsGo thanks for the reality check. Yes, dreaming is what I was alluding to. I agree- I plan to improve my financial strength over the next year and will remain patient.

@Dicey - haha! I regularly avoid using abbreviations; however, I used FTHB in my quest to create a short, snappy subject title.

@ChpBstrd I plan to bump up my work schedule for the next few months. Great point about the mortgage interest rates.

[Mini-Mer]

You asked about borrowing cash or getting a co-signer - I'd vote no way!  Even if you never miss a payment, your friend/family is going to be overly invested in all your financial decisions until you pay off the debt.  It will mess with your relationship.  (Loans to/from friends and family are a popular topic on this forum.) 

A bank will not judge you for your next vacation or worry about how many hours you work, as long as the checks come in.  It's not financial independence the way we usually mean here, but a house is not worth losing it IMHO.