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:
- No co-op buildings
- No buildings over 8 storeys high (the big buildings are still a bust from 2008)
- 60% condo ownership, with owners living in the building and not renting
- 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.