How one couple bought a home with only $5,000 down

Does buying a home seem out of reach? Well, FHA loans are making the dream of home ownership possible for thousands of Americans every month.

The secret? For an FHA loan, you only need a down payment of just 3.5 percent instead of the typical 20 percent that other types of loans might require.

That's exactly how Nicholas Conrad, 30, and Maggie Murphy, 32, bought their first home in Austin, Texas in April 2014.

The couple grew up in the area, where Murphy now works as an elementary teacher and makes $43,000 a year. Nicholas is earning an electrical engineering degree and works on parts for oil drills, making $35,000 a year.

Why the need to become homeowners?

"Housing prices in Austin have been rising very quickly with the amount of people who have been moving here, and rent levels are similarly on the rise, so we could no longer afford to continue putting all of our money into a home that wasn't ours," she explains. "We wanted to invest in a property now while we could still afford to."

Why an FHA Loan Made Sense for Them

Murphy says that choosing an FHA loan was what made homeownership possible for her and Conrad.

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"Nicholas and I both went back to school at the age of 26 to obtain our degrees and recently began our careers," she explains. "Because of this, we had little savings, and it would have taken us many more years to save a 20 percent down payment for a home, while the FHA loan only required 3.5 percent [down]."

Another advantage of the FHA loan was that qualifying was relatively easy, according to Murphy.

With an FHA loan, less-than-perfect credit is OK. Borrowers can get approved for an FHA mortgage with a credit score as low as 500, while the lowest score possible for a conventional loan is 620.

Additionally, the FHA is more flexible when it comes to a borrower's debt-to-income ratio, which measures what percentage of your income is used to pay for debts. The maximum mortgage payment-to-income ratio is 29 percent, while the maximum total fixed payment-to-income ratio is 41 percent.

"Our loan officer took care of everything for us," Murphy explains. "We just gave the usual requirements of pay stubs, credit checks, and tax info."

She adds that they also had to take an online home buyer's course that went over everything from putting in offers on a house to preventing foreclosure, but overall, the process was nothing but smooth.

Finding the Right Home

When the couple first began their house hunt, they knew they wanted something between $130K and $145K, which is the amount they had been preapproved for.

At the time of their pre-approval, Murphy says $145k was on the lower end for houses in Austin in general, but average for houses in the East Side of Austin, where they wanted to live.

"The East Side is historically a low-income community, however, it is beginning to be the new hot spot for Austin as people are moving further from downtown," Murphy explains.

Plus, they were already living on the East Side anyway, she says.

"We have many friends who purchased homes on this side of town so we very much wanted to stay in our neighborhood," Murphy adds.

When they found homes that they wanted in the neighborhood, they knew they had to act fast since the housing market in Austin is extremely competitive, says Murphy. To get the house they wanted quickly, they enlisted the help of a real estate company.

"Our realtors Bob and Michaela Hachtel [of Realty Austin] were extremely knowledgeable and helpful," she explains. "They helped us put in about six different offers before we finally got our house."

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With their budget, the couple could not afford a move-in ready house in Austin unless they were willing to move out to the suburbs - which as a young couple with no children, they did not want to do.

"Plus, we also knew that the FHA appraisal on our home was going to be more in depth, as they don't want to lend money for a home that will lose money."

She adds that they had to keep this in mind when searching for a home. "But it helped us make sure that we weren't rushing into a contract on a home that wasn't structurally sound," Murphy says.

The house they finally got was a two-bedroom, one-bathroom fixer-upper built in 1963.  They closed the deal in April 2014 and put down about $5,000 or 3.5 percent. The mortgage was $139,900 with a 30-year fixed rate of 4.375 percent.

Their current monthly mortgage payments are $1,083, which Murphy says includes mortgage insurance of $150 a month. Private mortgage insurance (PMI) is required on FHA loans to protect the lender in case the borrower defaults.

"These [mortgage] payments are just under what we were previously paying in rent for a similar home!" she adds.

And while Murphy knew that they could only afford a fixer upper, she wanted to make sure the home wasn't falling apart.

"We needed a structure with good bones: a sound foundation, good roof, and some updated features such as central air and heat," she explains.

And that's exactly what they ended up with: A 750 square feet home on .14 acres of land. The house recently had some foundation work, roof work, and a new central AC installed, says Murphy.

Because they were happy with the structure and land, the couple compromised on other things, such as the fact that the house will need a lot of interior updating.

For instance, Murphy says the house came with old carpet and the kitchen had not been redone in decades.

"We ripped out the carpet before moving in to expose the original hardwood floors and we were able to have them refinished," she says. "We also had the contractor knock down an interior wall to remove a hallway and gain more square footage in the living room."

She adds that the kitchen renovations are being done in stages, by removing old cabinets and eventually updating the countertops, changing the sink, adding a dishwasher, and retiling the floor in the kitchen.

"All of the work in the kitchen we are doing ourselves," Murphy explains.

Becoming Homeowners

Despite all the work they still need to put into the house, Murphy says they couldn't be happier with their decision to finally purchase a home. They are especially in love with the location of the home.

"It is within walking distance of a park for our dogs, and just blocks from very good friend of ours," Murphy adds.

When looking back at their home-buying process, Murphy says it pays off to work with a lender you trust.

"We had little knowledge of FHA loans prior to this journey, but Josh, our loan officer, was able to support us throughout the process and make sure that we understood exactly what to expect," she explains.