Buying Property As A Student: Can You Get A Home Loan In College Or Graduate School?
Kevin Graham16-minute read
April 09, 2021
College is a time for education and exploration. You might have also noticed it’s an expensive investment. A big portion of that investment goes toward room and board, often to landlords who are charging higher rent because they have a built-in market around the school with limited options for places to stay.
For those who qualify, buying property as a student could allow you to turn this system on its head by saving money on room and board and potentially creating an income stream for yourself after college. We’ll go over what you need to know to buy a house and make this happen. But first, let’s get back to basics.
Can I Buy A House As A Student?
If you’re in school, it may take a minute to get used to the idea of yourself as a potential real estate investor. But in reality, almost anyone who has the financial wherewithal can take out a mortgage to buy a home if they choose.
The one corollary to this is that you must have reached the age of majority in your state. That’s usually 18, but some states have their own age requirements and rules about when you can legally sign binding financial instruments like a mortgage.
You do have to qualify financially, and students in college – including those further along in grad school – may face several hurdles that make qualification more difficult. However, qualification certainly isn’t impossible. The rest of this article will help you become aware of those challenges before discussing moves you can make to clear obstacles from your path.
Why Buy A Home In College?
There are many reasons to consider buying a house while you’re still in school. Let’s run through a few of them before moving on to challenges and how to get yourself ready.
Avoid Room And Board Payments
Depending on market conditions in the area around your university and the amount charged for rent or room and board by a landlord or the college itself, it could actually be cheaper to buy a home in the area if you qualify.
When trying to decide whether it’s better to rent or buy, the first thing to think about would be whether you can qualify for a mortgage at this point. While we’ll go over how to hop that hurdle later on, let’s assume you do qualify for now.
The second important factor is your monthly costs. Based on what’s included in your rental agreement or room and board in the dormitories, you can do some math to figure out whether it’s cheaper to keep renting or by your own place. Here are several things to make sure you include in your calculations.
- Mortgage vs. rent payment
- Groceries/eating out budget vs. meal plan in the dorms
- Utilities – include water, electrical, gas and internet at minimum
- Maintenance – include factors like the cost of potential appliance repair and replacement as well as structural upkeep
- Homeowners insurance vs. renter’s insurance
- Property taxes
- Association dues if you live in a homeowners or condo association
When it comes to maintenance, it’s generally recommended that 1% – 3% of the home’s value is budgeted each year, depending on the age of the home and its condition when you moved in. If things are creaking, go higher.
Start Investing Early
It’s never too early to start investing. We all know that one person in our life who’s convinced if they make all the right moves, they can retire by 35 or a similar insanely sped-up time horizon. Real estate is one avenue for that investment. Although it can, it doesn’t have to take the form of buying a house either. Here are several options:
- Real estate investment trusts (REITs): REITs involve investing in trusts that back commercial and residential real estate developments. Your return on investment is tied to the success of the trust itself. These are often traded on exchanges and allow you to dip your toe in the water without going full bore into real estate.
- Syndication: The new age version of this is real estate crowdfunding platforms on the internet, but syndication is a form of investment that’s been around for years. Basically, a syndicator will go out and find a property for others to buy, renovate to flip or operate the property long-term and gain proceeds from rental. In exchange, they can charge an acquisition fee. They may or may not have their own money in the deal for a share of the proceeds. If you’re the type of person who has a knack for development, this may be something you can look into.
- Wholesaling: The practice of wholesaling is buying a home at a set price from someone who doesn’t want to go through the process of marketing homes and taking offers. The wholesaler then takes that same home and marks up the price a short time later and sells it. The difference between the sale prices is the profit, minus any marketing costs.
- Rental property: The advantages of owning a rental property should be obvious if you’re coming from a place of having paid a landlord for several years. It’s a great way to earn passive income without having to do much. On the other hand, you have to be willing to take on the responsibility of occasionally finding new tenants and you’re responsible for maintenance, which can cut into your return. Being a landlord also isn’t for everyone, but for those who are willing to put up with the downsides, it can be a good option for extra income. You can also convert a house you may have been living in during college into a rental property later on, provided you occupy the property as a primary property for a length of time stipulated in your mortgage contract.
Take On New Responsibilities
For students who see college as a form of independence and who have the financial means, a house payment may be that bridge toward taking on the responsibilities associated with adulthood. The house may come to symbolize their space, something separate and distinct from the support structures that may been in place for them in the past.
Handled responsibly, a house can be something that allows you to stand on your own.
The Challenges Of Buying A Home As A Student
We’d be lying if we didn’t say there are certainly higher hurdles to buying a home as a student. By going over these, we hope to help you become more prepared.
Income plays a role in two ways. First, debt-to-income ratio (DTI) takes a look at what your monthly debt payments are in relation to your monthly income and, along with your down payment, is one of the top factors in determining how much you can afford. We’ll get into debt in a minute, but the higher income, the better.
The first challenge is that the types of jobs available to college students are entry-level, low-paying or both. So you won’t have as much income right out of college as you will later in your career.
The second piece of this is that when you’re right out of college, the types of jobs you can get may be internships with no guarantee of full-time work. Your mortgage lender wants to know that you’ll have consistent income from your field in order to qualify you to buy a home. They’ll ask your employers about the likelihood of the continuance in the field.
Debt is the other half of the two-sided DTI equation. If your debt is high enough relative to your income, it can prevent you from qualifying for the home you really want or need. If you’re buying a home with student loan debt already on your books, it’s important to understand how this factors in.
If you have student loans and you’re still in college, any required payments are deferred until after you graduate. When student loans are in deferral, there are several different formulas that may apply in terms of how lenders take that future data into account.
For conventional loans, depending on which investor is backing your mortgage, if they can’t find the payment on your credit report, they’ll use 0.5% – 1% of your student loan balance per month to qualify you. If you can’t qualify with that payment, you can show your lender a copy of the statement proving your actual payment. Your Home Loan Expert will be able to help direct you into the best program for you by taking into account your student loans among several other factors.
FHA loans are qualified with the greater of the following student loan payments:
- 1% of the remaining balance per month
- $10 per month
- The actual payment showing on the credit report
Those getting VA loans are qualified with the greater of the following:
- Payment shown on the credit report
- 5% of the outstanding loan balance divided by 12
Finally, jumbo loans require you to be qualified with a payment of 1% of your student loan balance. In the event that proves to be beyond your affordability range, you can again show your lender a statement with your actual payment.
If you’re using a payment on the statement, that payment can’t be $0. If that’s the case, you have to be qualified with a percentage of the loan amount. With that said, there are some mitigations we’ll get into later on to help you qualify with student loans.
There are several things you need to think about saving for if you’re going to buy a home. The following is a short list of both one-time items and regular expenses:
- Down payment: Depending on the type of loan you’re getting and the number of units in the home (you can often get up to four units and live in one while renting out the others for extra income), you’ll need a down payment ranging anywhere from 3% – 20%. A 20% down payment is still considered preferable for many home buyers because it means avoiding private mortgage insurance (PMI) associated with conventional loans. Higher down payments also generally mean lower rates.
- Maintenance: We mentioned this before, but expect to pay 1% – 3% per year depending on the age and condition of the home.
- Homeowners insurance: Homeowners insurance has to be another consideration. Mortgage lenders require homeowners insurance so that your property can be repaired or rebuilt in the event of damage, but you can also buy coverage for the contents inside of your home in the event of theft as well as liability coverage if someone injures themselves on your property. Homeowners insurance is generally included in monthly escrow payments to make annual premiums easier to handle, but if you don’t have one, you’ll need to budget separately for this cost.
- Mortgage insurance: If you make less than a 20% down payment on a conventional loan, you’ll need to pay for PMI. The cost of PMI can vary based on your credit score and the size of your down payment, but it’s generally anywhere from 0.5% – 1% of the loan amount. FHA loans have mortgage insurance premiums (MIP). There’s an upfront fee of 1.75% of the loan amount they can either be paid at closing or built into your loan. There are also annual premiums that vary based on the loan amount and the size of your down payment or equity amount. It’s not mortgage insurance, but VA loans also have an upfront funding fee.
- Property taxes: Property taxes are based on the value of your home. These local assessments go up or down with that value. Property taxes may be paid out over a variety of time horizons depending on laws at the local level, but it’s typically split up in an escrow account in order to spread that cost throughout the year. If you don’t have an escrow account, this is another cost to budget for.
- Closing costs: Your closing costs cover things like title work, title policies, credit checks and appraisals along with local recording fees. On a purchase, these typically range from 3% – 6% of the loan amount. On a $200,000 loan, that cost is anywhere between $6,000 – $12,000. You can ask for seller’s concessions and lender credits to bring the cost down, but it’s something to consider.
College life doesn’t lend itself to stability. And stability is one reason you might want to get a mortgage, but there are a few big things to consider.
- You could transfer schools or move in short order. If this happens, you might have to sell the property on short notice, leading you not to see the same model of long-term investment potential that others might see in a home.
- You’re more prone to market fluctuations if you’re only in the home for a short period of time. History has proven that the housing values tend to go up at a fairly predictable rate over the course of a long period. But that doesn’t mean the real estate sector is immune to near-term fluctuations. You don’t want to end up in a situation where you have to sell because you need to move in the middle of a down market. College students are more likely to need to move.
- Finally, you don’t necessarily have income stability with the jobs you can get in college, particularly if it’s something like a temporary internship.
It’s a ton of responsibility to own a home. Even if you’re just living on your own, a mortgage represents a relatively large monthly payment that you need to be sure you can make. If you’re the landlord, the maintenance responsibilities and tracking down rent can be time-consuming and can hit your pocketbook.
You may have to figure out how to balance your student life with the responsibilities of homeownership, and that’s not always easy.
Tips For Acing Your Mortgage Application
Knowing all the pros and cons of buying a home while in college, there are things you can do to mitigate some of the hurdles faced by college students in affording a purchase as big as a home. Let’s run through them.
Don't Disqualify Yourself If You Have Student Loans
Just because you have student loans and they count toward your DTI doesn’t mean you automatically won’t be able to afford a home. In order to qualify for the most possible mortgage options, your DTI should be kept under about 43%. However, some loan options feature more flexible DTI ratios, particularly FHA and VA loans.
Moreover, it can sometimes be worth waiting until you’re repaying your student loans in order to qualify. The reason for this is that lenders and mortgage investors have more certainty over what your payment will be when it’s out of deferral. Some loans are qualified using the same policies we talked about above where the loan is in deferral, but others have a lot more flexibility during repayment.
A conventional loan from Fannie Mae and our Jumbo Smart loan both allow you to qualify with an income-based repayment of $0 on your student loans if you have difficulty qualifying otherwise and you can prove that you’ll be on the income-based repayment or pay as you earn plan at least through closing.
FHA loans usually follow the same rules for repayment of student loans as they do when the loans are deferred. However, there’s an exception where we can use the actual payment on the statement if the payment pays off the full loan by the end of the term without being subject to decrease.
Make A Down Payment Strategy
Obviously, one of the big obstacles is saving for a down payment, but there are things you can do to help yourself when it comes to saving for a house. Everything from careful budgeting to cutting out things you don’t need to picking up side hustles helps.
If careful saving habits aren’t getting you where you want to be or not getting you there fast enough, you can also look at down payment assistance programs.
Certain mortgage options offer you the chance at buying a house with no money down. If you’re getting a VA or USDA loan, you also have the option of not making a down payment at all. Note that with a VA loan, there is still a funding fee that can be paid at closing, but it can also be built into the loan. At this time, Rocket Mortgage® doesn’t offer USDA loans.
Improve Your Credit Score
Your credit score is one of the most important things to think about when applying for a home loan, both from a basic qualifications standpoint and when trying to get the best rate possible. We have several tips for improving or establishing credit, but here are some of the biggest things to think about:
- Payment history: The biggest factor in determining if you have good credit is whether you make your payments on time on installment loans as well as revolving credit accounts. The more you can make your payments on time, the higher your score will be.
- Credit utilization: Credit utilization is the amount of your available credit line that you’re using at any given time. For example, if you had a credit line of $1,000 and regularly carried a balance of $250, that would make your credit utilization ratio 25%. Ideally, your utilization should be kept under 30%. It’s also important to note that if you regularly fully pay off your credit cards, you don’t have to pay interest. That’s ideal.
- Credit mix: Lenders want to see that you can effectively handle both the revolving debt brought on by credit cards and installment payments on things like student or car loans. If you haven’t begun making payments on a car or student loan yet, one thing you can do is look into credit builder installment personal loans that may be offered by your financial institution of choice. If you’ve never had a credit card before, you can get a secured card where the credit limit is based on money you deposit in your account.
- Age of credit: Age of credit is also a factor. The longer you’ve had credit accounts and loans, the longer your history. Unfortunately, this is one factor that tends to work against college students because of their age. However, this should also bring your awareness to the issue. If you haven’t established credit, you should do so as soon as possible by opening some kind of account. Even if you don’t plan to buy a home or make major purchases immediately, you should do this to start building that history for the future.
- New credit: The last big factor that impacts your score is the amount of new credit you have. If you start opening a bunch of new credit lines or taking out several loans at once, it’s a red flag for lenders that there’s a reason you need all those resources. You might be struggling financially.
If you’re looking for more personalized tips, you can get a free once weekly VantageScore® 3.0 credit score and report from Rocket Homes®.
Home Buying Programs For Students
There are a variety of first-time home buyer programs that might be helpful if you’re a student looking to buy a home. Let’s run through these.
The first resource we recommend is the Department of Housing and Urban Development (HUD). HUD loans are backed by the FHA, USDA or VA. What you might not be as familiar with are the different resources they offer to home buyers.
If you’re extremely lucky, they even have a program where you can get a home for as little as $1. The idea is to allow homes worth $25,000 or less that have been foreclosed upon to be sold for $1 after 6 months on the market to low- or moderate-income individuals and families so that the house is occupied and taken care of. It’s worth noting that not many homes fall into that value criteria right now, but the Dollar Homes program does exist.
Beyond that, HUD maintains a list of local home buying resources that could be well worth checking out.
FHA loans are also offered through HUD, but they deserve special attention because they have some features that could be particularly useful for somebody in college. For starters, if you have a relatively low DTI, you can qualify with a median FICO® Score of 580 or better.
Secondly, if you have a slightly higher FICO® Score of 620 or better, FHA loans allow you to qualify with a marginally higher DTI than you can on almost any other loan outside of VA loans, which we’ll get to next. The exact DTI limits will depend on your situation. Speak with a Home Loan Expert.
In certain situations, FHA loans also allow for manual underwriting. This may help people who have thinner credit files to be approved based on a thorough review by a trained underwriter.
VA loans are available to eligible active-duty service members, reservists, members of the National Guard, veterans and surviving spouses receiving dependency and indemnity compensation.
There are a couple of major benefits to VA loans. To begin with, there’s no down payment requirement. Also, you can qualify with a higher DTI on a VA loan then you can on any other major loan program out there. On a fixed-rate loan DTIs as high as 60% qualify at Rocket Mortgage®.
The VA also doesn’t set a specific minimum FICO® Score requirement, so you may find some flexibility there. At Rocket Mortgage®, we require a 620, but other lenders may have different standards.
Finally, as with FHA loans, there are possibilities for manual underwriting that might help some qualify.
Although you need a credit score of at least 620 in order to qualify, the major advantage of a conventional loan as opposed to an FHA loan is that as a first-time home buyer, you can qualify for a down payment as low as 3%. It’s 3.5% on FHA.
Also, you avoid the lifetime mortgage insurance that comes with making the minimum down payment on an FHA loan. The mortgage insurance on conventional loans generally can come off once you reach 20% equity.
If you know you can make a monthly mortgage payment, but your lower income prevents you from qualifying for the house you would like, co-signing could be a good option. When you have someone co-sign with you, they’re taking joint responsibility for the mortgage.
The advantage of this is that you get to use their income to help you qualify. This has the effect of lowering your DTI and increasing the amount you can be approved for.
As a practical matter, people who are closest to you, like family, are most likely to agree to co-sign with you. No matter who does it, it’s a big decision. If you fail to make a payment, they’re as responsible for that mortgage as you are. If you miss a payment, it affects their credit as well as yours. You should absolutely know you can afford a payment so as not to let them down. This goes back to making sure you’re ready for that responsibility.
The Bottom Line: Weigh The Risks And Rewards
If you’re thinking about buying a home as a college student, there are many practical reasons for doing so, including avoiding giving money for room and board to someone else, the investment potential inherent in real estate and the ability to have certain responsibilities as a gateway to your own independence.
It does come with its own challenges as well. Your income is likely to be lower, which might mean that you have more debt right now and less savings. Career stability isn’t a given right out of college and you might not be ready for the level of responsibility that buying a home entails.
However, if you are ready, student loans don’t necessarily have to hold you back. There are also ways to supercharge your savings for a down payment and concrete steps you can take to raise your credit.
If you’re looking for resources, HUD isn’t a bad place to start. FHA, VA and conventional loans also have their own advantages for those looking to buy a home. Finally, co-signing a mortgage is a pact based on mutual trust. However, it can help you lower your DTI by qualifying with the assistance of another person’s income.
If you want to get an idea for what you might be able to afford, you can dip your toe in risk-free by using our mortgage calculator. If you’re ready to move forward, you can get started by applying for a mortgage online.
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