Over the past couple of weeks, Janna and I were given a hardcore beatdown in the housing market as we tried to figure out how, when, and where to finally buy our first home in Jersey City or New York City.  We quickly found that an FHA loan — a Federally-sponsored mortgage program where you only have to put down 3.5% of the purchase price instead of the standard 20% — is but a dip in the yonder horizon:  A great idea in theory, but an impossible dream in reality.

The 2008 housing crash ruined everything for the first-time home buyer.  Nobody trusts anybody now.  Everybody’s playing an angle.  Everyone wants a quick and fast and dirty deal and nobody wants to deal with the red tape the FHA loans now require.

As one of Janna’s Black co-workers told her, “An FHA mortgage means to sellers and brokers that you’re Black and can’t afford a real down payment.  They don’t want to deal with that.  Try again later when you have more cash for 20% down.”

We were a bit rocked by the news that an FHA loan means we’re poor and Black — even though we are neither — but we were certainly getting that vibe in the marketplace.  One local broker would not even accept an offer from us unless we used someone local on her pre-approved mortgage broker list.  Our pre-approval FHA loan from the National Bank of Kansas City was unusable.

We learned that, locally, no agent wants to deal with “the internet” or Quicken Loans or Zillow or anything virtual and beyond the control of their local circle of comfort. They also only want to do deals with people they already know. So, we had to start the mortgage application process all over again, with hard pulls on our credit again, and it was all messy and, ultimately, for naught.

FHA loans do carry the mark of the loser, even though the whole program was created to help people just like us — middle class, blue collar, artists and teachers — to be able to afford to purchase their first home in a final realization of American Dream of homeownership.

In New York City — the toughest place, by far, in the nation to get an FHA loan approved — had these impossible requirements:

  1. No co-op buildings
  2. No buildings over 8 storeys high (the big buildings are still a bust from 2008)
  3. 60% condo ownership, with owners living in the building and not renting
  4. Must have $10,000.00 USD cash in closing costs in hand, and verifiable, beyond the down payment — even if the seller will eat the closing costs.

We quickly ran away from even thinking about New York City as a condo option.  Jersey City was only marginally better.  The FHA requirements were less severe, but there were not a lot of FHA-approved buildings to choose from because, after the 2008 housing crash, building owners let their FHA-approvals expire.  What a mess!

To get a right condo in Jersey City, we were looking for the following:

  • Doorman building (adds about $100,000.00 USD to the price)
  • Elevator
  • Close to the trains

Not a big list of requirements, but still super tough to find it all in an “FHA approved” building that matches those few wants. We didn’t want the hassle of maintaining a standalone single family home. We were looking for a condo. FHA loans cannot be used to purchase an apartment in a co-op building in any State.

We found ourselves wading in the $300,000-400,000 range with those few requirements for a one bedroom condo, and if we wanted two bedrooms, we were easily in the $500,000 range.  The $200,000 range could get you a Jersey City pre-war condo, but no doorman and no laundry in the apartment and no dishwasher.

If you’re cash poor, you’re in trouble without an FHA loan.  Here’s how the math works out:  3.5% of $300,000 is $10,500 — not a bad down payment for a first home — but if you open yourself up to the traditional mortgage, then you can pick any building you like without worrying about getting FHA approval as long as you have 20% cash in hand for the down payment.

For the same $300,000 condo, you’d need to have $60,000 cash in hand for a traditional mortgage instead of $10,500 for an FHA loan. That’s a pretty massive difference in cash and carry — and that’s why first time homeowners want FHA loans and why sellers and agents hate them. Bids with more upfront cash means a “more serious buyer” in the minds of the local marketplace.

We quickly learned the key phrase in getting an FHA mortgage is the “Gift Letter” and everyone we spoke to told us to get one.  A Gift Letter is a signed piece of paper from anyone in the world saying they are giving you cash to help you purchase your first home.  The Gifter gets some sort of tax benefit, and so do we, and the gift can be any amount up to, and including, the full purchase price!

The problem with getting a Gift Letter is that someone needs to give you money!  You can’t Gift Letter yourself.  The FHA needs to see where the source of the gift is coming from so they can be sure you aren’t taking out a personal loan or a credit card advance to help you buy your home.  Now I understand why so many married couples get housing down payments as wedding gifts from their parents:  Everybody wins!

We didn’t have a Gift Letter.  Every single person still told us to get one.  We didn’t have any avenue to get one.  We were told to get one anyway.  I don’t think I ever really caught on to what they were trying to tell us without telling me.  I don’t take hints very well. Maybe they were saying the Gift Letter is all in the Letter — even if the Gift is never actually made?

In the end, we decided to give up.  We were about $15,000 short of cold cash in each and every scenario and we’ll just have to save more money and test the housing market waters again in a year or so.  Or we may just keep enjoying the freedom of renting.

If you have any experience or insight into this home buying process and FHA loans, please get in touch by leaving a comment or by using our Contact form to send an email.  We’d love to learn how to deal with the frustration and confusion of actually getting your first home in hand.

26 Comments

        1. Greed was definitely at play. Asking prices for the same apartment were $75k more now than they were just a few months ago: Zillow is the buyer’s best friend! No wonder all the agents disavow Zillow so much.

          A new housing bubble is forming and the agents are salivating. Outrageous prices that get offered, and accepted, by force of the market and, I’m betting, killed when the actual appraisal is done.

          How can any buyer “make up” a $40k difference between asking value and appraised value when that fact comes back to smack them square in the face? It’s 2008 all over again!

  1. I so feel your pain – what a nightmare of a maze to work your way through – and how ultimately depressing given your relative wealth and status. it is similar but different in the UK but more sympathetic to those who participate in government programs, which assist with shared equity, interest only mortgages etc.

    I have window shopped only in the Portuguese market – and have to say that we are both quite happy renting now we have found the right house to rent from the right people.

    Do you get much interest on savings over there ?

    1. The best savings programs are actually pre-tax contributions to retirement accounts. You can borrow against those deposits once to buy a home, but a lot of the plans pressure you and red tape you to discourage you from getting at your own money. It all takes a ballet of time. If one thing happens before the other, then the deal is dead and you have to start all over again.

      Most people of our age and experience never buy — especially in NYC and Jersey — you just resign yourself to renting. The NYC rental market is crazy now, too, with the application requirements to RENT a $3k a month place becoming even more stringent than getting an FHA loan!

      1. they are all very keen on getting your money – not so keen on letting you have it back – or borrow against it.

        It amazes me how strict your requirements are – I guess those bankers have a lot to answer for.

        1. That’s the most confusing part. Your agent represents you — but what is the benefit of underbidding if they’re sharing in the sale price with the seller’s agent? It seems the keen agent on both sides would always find a way to bid you up to “make sure you get it” and freeze out the other bidders because the higher the sale price the bigger slice of the commission they take home! It’s a conflict of interest from every angle.

          Yes, the banking meltdown hurt homeowners only — the Feds bailed out the banks so they didn’t lose anything — and now the rest of us are stuck footing the bill. Guilt by non-association.

          Many of my home building friends told me two years ago that the time to buy was RIGHT NOW. 2% interest rates. Gangbusters! People desperate to sell. We just weren’t ready to put money on the table. Now interest rates are 5-6% if you’re lucky and the new bubble is beginning and prices are going to skyrocket soon before everything crashes again.

  2. @David – it is confusing ……….

    Over here you have people who are desperate to sell for what ever reason – and those that already have money and stick silly prices on their property hoping a tourist will fall for it !

    I hope you are investigating the homestead/farm idea – I think that is just wonderful.

    1. It’s a strange game of wait and see. There was one “guaranteed sale” of a great condo we saw two weeks ago at an open house. Five bids over asking price, so we didn’t even dip our toes in that one. I now see that same condo is having another open house on the 14th — so I guess all those overbids failed. The asking price has not been lowered from $499,999.99USD for the one bedroom apartment.

      I’m quite certain the reason the offers failed was because the appraisal of the condo did not meet the asking price. You can’t just add $60k to an asking price in a week and expect the banks to play along — and few buyers are desperate enough to have to cover the difference between actual value and inflated asking.

  3. I’m curious if there’s been any updates to this… my husband and I are in JC and are considering to go see a mortgage broker. Considering our income and how much we’ve been able to save.. it’ll be a long while before we have 60-70k to drop on a down payment.. I’m in grad school and we’re hoping to get into something ANYTHING with an FHA loan.. we have little consumer debt, we have closing costs and down payment in retirement and our savings account and we save over 1k a month each and every month.. We don’t need anything fancy, we don’t live downtown… and quite frankly I think the folks there are paying way too much considering what you can get in the Heights (we rent a bottom floor of a Victorian from a family for 1300.00) and I really think this neighborhood is going to be next because of the redevelopment happening at Journal Square and Hoboken right down the hill that’s bursting at the seams… I just want to get in somewhere before it’s just not possible and before i’m out of grand school and the loans hit me like a ton of bricks.

    1. We gave up.

      FHA loans are troublesome. Realtors on either side of the dyad don’t want to deal with them. Mortgage brokers don’t like the red tape — the process is even stickier and more punishing now than it was when we were looking.

      Sellers don’t like FHA loans and several properties that interested in us were knocked down by the seller’s agent because they preferred any offer over an FHA offer. FHA loans take a lot of time and sellers with great properties don’t want to wait for you.

      Cash is king and you need a lot of it if you want to get a decent place. Even an FHA loan demands a lot of cash for a downpayment.

      You will be inundated with requests from your broker and realtor to get a “gift letter” from anyone promising to give you a large sum of money to buy a house. They live off the gift letter because it means big business for them. Unfortunately, if someone does give you a large sum of money as a gift for a house, they will have to turn over documents explaining and detailing how and where they money they gave you came from… who would want to deal with that hassle?

      If we try again, we will not use a mortgage broker — sure, there’s no fee, but they’re not on your side, they’re on the side of the lender who will give them the best deal — and we will also not go FHA. You are much too limited in purchasing power by getting an FHA loan and finding FHA properties for sale is not an easy task and takes a lot of realtor time and they quickly become resentful. It’s better to go straight to the bank you deal with every day, pay a fee, and get a reasonable interest rate for a home mortgage.

      Your student loans will be factored into your mortgage even though they aren’t due. They’re already counting against you.

      Good luck and keep us updated!

      1. You were looking strictly at newer construction condos though right? I mean, given the type of loan and the folks that are buying newer construction condos, it’s obvious they’d go with a buyer with a traditional loan, whereas if you were looking for something in the heights, maybe not.. The guy in Hoboken we’re working with says most of his business are FHA buyers. Also, they don’t factor the loan payments in if you don’t have payments due within 12 months, or so says what I’ve read in various places.. Of course they count the debt, but they won’t count it toward your monthly debt payments.

        1. Not necessarily strictly new construction. We live in the Heights right now and have for 13 years. Last summer, a 1-bedroom at Canco was $385k and a 1-bedroom in North Hoboken near the light rail was $490k. These were not elaborate or elegant places — sort of funky and maybe a half-step up from where we currently rent neat Christ Hospital.

          FHA-approved buildings can be hard to find and newer buildings aren’t qualifying because the builders don’t want to do the red tape paperwork since the 2008 crash. There were a couple of condos near Hamilton Park in brownstones and one on Duncan Ave — but by the time we figured out they were FHA-approved buildings, they were sold to non-FHA buyers who had more cash for the downpayment.

          Zillow is your best friend. Your realtor will hate it and dissuade you from looking — BUT LOOK! You’ll see the history of the pricing, and what Zillow thinks a place is worth. That will help you in determining valuation, because if you bid on a place, and it’s too high, and the accessor gives you a lower value than what you bid, you’re responsible to make up the difference in price and assessment, and that counts against you in addition to any downpayment you hope to make.

          On Zillow, the 1-bedroom at Canco showed us it was on the market for $330k two months before we looked — a difference in $50k — and the spot in Hoboken is still being Zillow-accessed at $435k and not the “rock-solid” $490k asking price we were quoted.

          It’s all a scam, really. Nobody’s on your side because both realtors want you to pay the highest price possible so they can split the most money. That’s why something like Zillow is your ally — even against the realtor who is allegedly working for you. Nobody wants to give up any money or lower any price. There’s always someone else bidding against you — even when there’s not. That’s the game.

          You’re right about the student loan, but here’s the catch we were always tied up against: Unless you time it just right when your 12 months rolls over, you cannot ever give them a mortgage letter stating anything longer than a year! A 10-month letter won’t satisfy the lender. It’s a Catch-22 with no end to the cycle except at certain time once a year.

          1. Thanks so much for the tips!
            I will let you know what we find.. we’re in the early stages right now finding out what’s available to us loan wise and how much cash we must have on hand afterward…

  4. Certain realtors are very picky about who they will work with. The very busy ones tend to only want to deal with borrowers tha have large downpayments and conventional mortgages. FHA mortgages have very strict property requirements and if there are minor repairs noted in the FHA real estate appraisal, they will have to be fixed by the seller prior to settlement. For that reason, some sellers will not accept and contract if the financing will be insured by FHA.

    You don’t need $10,000 cash in hand for closing costs. The lender or broker can pay a large part of your closing costs by raising the interest rate a bit. In addition, the seller will also be willing to chip in, but he may require you pay a little more for the house. He’s only concerned with his NET cash at settlement.

    If you select a broker, you can likely negotiate a better rate than if you work with one of the realtor’s preferred lenders. Those lenders are accustomed to having business dropped into their lap and they don’t have to be competitive. You should stay away from them.

    If you are looking at a condo, you will run into similar problems with respect to the number of owner occupants and other factors. Fannie Mae has an approval process for condos, just as the FHA and VA do. If you are dealing with a demanding realtor, find another one who is willing to work hard for you.

    1. Thanks for the comment!

      In New York State, we were told, the law is the buyer MUST have enough verifiable cash in hand for closing costs — in addition to any downpayment — to move forward with a contract. Yes, you can negotiate back the closing costs later in the process, but the buyer has to have closing costs cash in hand to start the application process for a loan.

  5. quick update- we just started legitimately looking and are going to a mortgage broker this week. We have money for a down payment, 20% for cheaper properties, less for things more expensive. I’ll keep you updated. We met with a realtor that works with FHA buyers in the area and the mortgage guy is also FHA friendly… I’m hoping we can find something with that loan either here or further out in Bloomfield or Union… just because my student loan situation really stinks… and I have a year before they’ll factor that into payments. oy.

    1. Hi Amy- You aren’t going to find an FHA condo. Nearly all of the condos in the NYC area let their certification go after Sandy. It may work if you are looking at a house depending on where you are looking. Prices have gone up since we were considering buying in JC. We looked at some closer to the university since that’s an area that may be considering up and coming but it was just, not safe enough yet for us to consider making that investment. We did start looking in JC though but are now targeting Rahway since it has been rezoned largely as a community encouraging arts and there’s a revitalization there happening. That Elizabeth/Linden/Rahway line is sort of the next to come up in the suburbs after what’s happened around Montclair and South Orange/Maplewood. We bid and had everything set to go on one house, the seller dragged their feet for six weeks, we were ready to close immediately after our inspection but there ended up being a lot of problems. Second house was put into contract hours before our bid, and now we are bidding on what has been our second choice through the whole process.. Everyone we have worked with has been super FHA friendly. Our realtor’s name is Joseph Schmidt.