How to Buy a House Without the Use of Credit
Ok lets get some general facts out the way first before we begin.
We’ll use a typical CA situation where someone is taking out a loan for a house lets say worth 400k. The borrower really cant afford that much house but the bank approved them for it so they decide not to resist the temptation and go for it. In addition, they are taking out the loan in full awareness that they will not be living in this home for over 10 years. In most cases, they have sold themselves the California dream of “buying” something, sitting on it and watching it increase DRAMATICALLY in value. Now in all fairness, this DID happen between 2002 and 2006. However, I dont think I need to tell you that the world soon realized those profits were “phantom profits”, meaning they were propped up artificially based on extreme leverage. Basically, those home values were never supposed to and most likely NEVER WILL rise like that again in the foreseeable future. In addition, most of the people who experienced these dramatic rises in their property values never got out of the game..thus sticking around to the absolute end and going down in flames. Why? Greed for one. But for the most part it is extremely hard and against human nature to get out of something that is making you large amounts of money …even if the money never really existed. Now that we are all on the same page, lets continue to the specifics.
What they WANT you to do.
Most CA homeowners get tired of their homes within 3 years then end up selling their homes after 5 years. So now lets say a loan has now been drawn on the home for $400k. Since this is post real estate collapse, the borrower is now required to come up with the full 20 percent down (80k), pay the usual closing costs (lets say $10k). If their credit isn’t perfect they’ll likely try to pay points to get their interest rate lower to somewhere near 5% and that may cost them more in fees (another $4400). Next they may have to come up with 1.25% for property taxes (another 5k), along with a whole host of other potential fees like pre-paid mortgage insurance premiums etc. But so we don’t get too complex, we will add only these numbers for now. By doing so, we realize they will need $99,400 just to get INTO the house and a monthly payment of about $1900 to maintain it. Granted the 80k in down payment does go towards the principal on the house but as I will soon be showing you, none of that matters when the bank comes and takes that bad boy from you. Why? Because society has taught us that this is called “homeownership” when in fact its LOAN ownership. Don’t nobody own that house but the bank for the next 30 years….and let yourself slip up…they will be quick to remind you. So basically, now the borrower just came up with about 100grand that they could have been earning interest on just to move into a place they don’t even own. Same page? Great, lets move on.
The borrower has now been living in the house for 5 years and decides they either don’t like CA anymore have been running into financial trouble and its time to sell. Lets look at where they are number’s wise. The borrower has been paying $1900 a month for 60 months (5 years) which means they have paid out a total of $114,000 to the bank. Lets add in annual property taxes which on this house, $25,000 total over 5 years. Then lets not forget the joys of “home ownership” and having to pay for your own repairs or upgrades. Lets say this on average is an additional $3500 a year or about $17,500 total. HOA must now be paid every month at $250/month or a total of $15,000 over 5 years. And we wont even get into furnishing costs for a large home, design, the higher price for utilities or typical late fees if you slip up and pay your loan late or property taxes late. But none of that has shit on this cuz here’s the kicker. The borrower has finally started to pay attention to the fine print on their statements and realizes that for the first 7 years of many loans, all you are doing really is paying INTEREST…LITTLE PRINCIPAL. Lets total this up…$171,500 for five years of living in something they again…don’t own. Lets add this to the 100k they initially had to put up just to start this process and also we’ll realize the only way they had been affording this house recently was from opening and using lots and lots of credit products. All of this added together leaves our grand total at $271,500….simply for the possibility of loan ownership for 5 years.
So they decide to sell it. We will be generous and say the home appreciated in value $15k a year or about $75k in total for the 5 years. This brings the total value of the home to $475k. Barring any MAJOR repairs needed to the property, the seller must now come up with 3percent of the home’s value to pay the real estate agent …this equals $14,250. Lets again factor in closing costs and moving expenses…12k. Now when the home is sold for the full $475k and your expenses for selling come out to be 26k that means you have $449,000 to present to the bank and clear up any difference in amounts owed. The 449k minus the $320k you still owe the bank means that’s $129k for you to pocket right? Well that’s all people will tell you when they brag of their sales. Hopefully you are with me because this is where it gets important. Lets remember something, they are in debt. Remember that $271,500 grand total that they had paid for “loan ownership” we just recently discussed? If you subtract the $271,500 from the 80k they originally put down then minus that from the $129k they got back from the home sale, that leaves them with a NEGATIVE $62,500 that they are STILL IN DEBT for. Or in essence, they did all of that for what they thought was an investment and still ended up $62,500 in debt. And this was one of the less vicious stories/examples we’ve seen recently.
What they DONT want you to do.
Now lets look at a quick example of what life would have been like if this had been done without credit. Remember, you pay a premium for ease and the method I’m about to describe was NEVER meant to be easy. It was meant to keep you out of the above scenario, keep you free from bondage and allow you to prosper. Here we go:
The same homeowner asks themselves “how long do I really think I’ll want to live in this house?”. They conclude 5 years max. Then, remembering from the first example (lets say the homeowner had recently learned from a friend’s personal experience) they realize that its probably better to start small on their first home purchase and they also understand there is a high probability they will get tired of whatever purchase anyways. They then decide to profit off of another’s misfortune and acquire a foreclosure (or shortsale). They decide to start small with a condo that just became available as a distressed sale and was way below market value at $120k (it could be in an underdeveloped part of CA or even in another state). Also, the homeowner had been extremely disciplined and had already been saving/investing 2grand/month for the last 60 months (five years). Assuming an 18% appreciation like in the first scenario with the home loan, the condo generates a return in 5 years of an additional $22k. Now remember, since the homeowner had been living way below their means and was saving 2k a month, they are buying the condo outright in cash. This means they are paying ZERO mortgage and for the next 5 years they are still able to save the 2k/month just like before. Also remember, since there is no loan, there are no mortgage rules, no mortgage interest, there is no paying down interest points, no credit checks, no need to pay off debt to show a proper debt/income ratio and there is no need to get in over their heads with credit cards. All of this while currently living free of a monthly payment.
Nevertheless, they decide to sell the condo. There was however, still property taxes ($1,500/year or $7500 for the 5 year duration) to deal with, Home Owners Association dues $125/month ($7500 for the 5 years), closing costs for the buy along with the sale ($5000 total), 3% for Agent’s commission ($3600) and lite maintenance (since they started off in a smaller place its $5000 for the 5yr duration). All of this adds up to $26,100. Also, assuming an 18% appreciation like in the first scenario with the home loan, the condo generates a return in 5 years of an additional $22. Subtracting the $22k from the $26,100 leaves only $4100 it cost them to live for FIVE YEARS….in their OWN HOUSE.
The homeowner completes the sale for $144k. and subtracts the $4100 in leftover fees to leave them with about 140k in proceeds from the sale. Now lastly, we won’t forget about the 2k/ month they were still saving while living there which added up to be another 120kover the 5 year period. This gives the recent home owner a grand total networth of $260k. They also have no debt and are ready to buy the next foreclosure in cash and repeat the process with each step up generating more of a return.
I assure you, this is possible and is being done in many parts of the world where they werent raised on a debt dependance. With a little work and discipline, this could be you.
(FYI- you could still come up with the same type of numbers if you used the 120k condo to get a loan…it still ends in more interest paid, uneccessary temptation to take out a higher loan amount than need, potential debt hazards and more regulations you have to follow)