Can A New Grad Buy A House? A Guide To Home Buying After College
February 14, 2024 9-minute read
Author: Victoria Araj
Are you wondering if it’s possible to buy a house after graduating from college? The short answer is yes – you can buy a house as a new grad. However, recent college graduates may face more challenges when it comes to qualifying for a mortgage and taking on the responsibility of homeownership compared to other home buyers.
Nevertheless, home buying can be a good fit for many new grads – it ultimately comes down to your particular financial situation and life plans. So, are you ready to buy a home as a recent college grad? Check out our guide to find out if it's the right decision for you.
What Are The Obstacles Of Buying A House After College?
Buying a house as a student or recent college graduate can present several barriers to new buyers. Compared to home buyers with more secure personal finances, post-grad buyers may have more factors to consider, especially if you’re looking to finance the home purchase with a mortgage loan.
Let’s take a look at some of the factors that can make it more challenging for new grads looking to buy a house.
Lack Of Income
Recent college graduates may find it difficult to buy a house if they don’t have a steady source of income. Most lenders have income requirements when evaluating mortgage applications. Your lender will want to make sure you have the funds to make your monthly mortgage payments before offering you a home loan.
Instead of providing your employment history, however, some mortgage lenders may only require your college transcripts or a valid diploma. This varies by lender, though, and often you’ll need more than just a college transcript to buy a house. Your lender may require additional employment documents to prove that you’ll be able to pay back the loan.
Buying a house also comes with several upfront expenses. These costs can really add up if you don’t have the savings to cover everything. Some of the most common costs of buying a house include:
- Down payment (3% – 20% of the purchase price)
- Closing costs (3% – 6% of the purchase price), which include a home appraisal fee, homeowners insurance and property taxes
- Moving costs
- Other homeownership expenses, like home repairs, a home warranty and HOA fees
If you aren’t financially prepared for the upfront costs of home buying, you might want to hold off on the home purchase until you have a steadier income stream or more money saved up.
Keep in mind that it’s entirely possible to get a mortgage with a low down payment – in some cases, as low as 3%. You might also qualify for different down payment assistance programs and grants.
High Debt-To-Income Ratio (DTI)
Your debt-to-income ratio (DTI) plays a crucial role in determining whether you qualify for a mortgage. Your DTI shows the amount you spend on monthly debt payments compared to your monthly income and is expressed as a percentage.
Most lenders prefer mortgage applicants who have a DTI of 43% or less. If you have a high DTI, it shows lenders that you owe high amounts of debt. The higher your DTI, the more of a risk you appear as a borrower. This can be especially true for new college graduates who have student loan payments.
Luckily, there are several home loan options with more flexible DTI requirements for qualified borrowers. We’ll get into that later on.
Feeling good about your DTI?
Find out how much you qualify for with Rocket Mortgage®.
Limited Or No Credit History
Lenders will also assess your credit score and credit history when determining whether you qualify for a mortgage. Your credit score shows lenders how you handle your debt payments. The length of your credit history also contributes to your overall FICO® Score. The stronger your score, the more reliable of a borrower you’ll seem to lenders.
Borrowers who have a limited or no credit history may find it difficult to qualify for a mortgage loan. It can take a little while to build up your credit score if you opened your first credit card during or after college.
In the meantime, monitor your spending, make all of your credit card payments on time and request a copy of your credit report before applying for a mortgage. You won’t want to risk dinging your score if buying a house is your end goal.
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Mortgage Options For New College Graduates
While buying a house as a new grad can be challenging, it’s still possible to qualify for a mortgage and find your new home. Below, we walk through some of the best home loan options for first-time home buyers – including recent college graduates.
An FHA loan is a mortgage option that’s backed by the Federal Housing Administration (FHA), an agency under the Department of Housing and Urban Development (HUD). FHA loans have looser borrower requirements compared to other types of mortgages, making it a great option for buyers who recently graduated from college.
Some of the requirements that borrowers need to meet in order to qualify for an FHA loan include:
- A minimum credit score of 580 (for a 3.5% down payment)
- A credit score between 500 – 579 (for a 10% down payment)
- A DTI of 43% or less
- The home must be considered a primary residence
- You’ll have to pay a mortgage insurance premium (MIP)
- Your income must be verified through documents like pay stubs, tax returns and W-2s
Recent college grads may also consider applying for different conventional loans. A conventional loan is a mortgage that meets the standards set by Fannie Mae and Freddie Mac. While conventional loans tend to have stricter borrower requirements than government-backed mortgages, they can be a good option for grads who have a higher credit score and more money saved for a down payment.
The specific requirements to borrow a conventional loan can vary by lender and loan type. However, some of the more standard qualifications include the following:
- A minimum credit score of 620
- A DTI of 50% or less
- A 3% down payment (for first-time home buyers)
- You’ll be required to pay private mortgage insurance (PMI) if you make a down payment less than 20%
- The size of the loan cannot exceed $726,200 (for single-family homes)
Fannie Mae HomeReady®
Fannie Mae’s HomeReady® loan program is another mortgage option for new graduates. The program is geared toward creditworthy borrowers who earn a low to moderate income. The HomeReady® program also provides flexible sources of funding for borrowers who may need assistance covering their down payment and closing costs.
If you’re thinking about applying for a HomeReady® mortgage, you’ll have to meet the following loan requirements:
- A minimum credit score of 620
- A minimum 3% down payment
- Income that’s less than or equal to 80% of your county’s area median income (AMI), which can be determined through Fannie Mae’s AMI lookup tool
- Participation in approved homeownership education courses
Freddie Mac Home Possible®
New grads may also want to consider Freddie Mac’s Home Possible® loan program when comparing mortgage options. Similar to Fannie Mae’s HomeReady® program, a Home Possible® mortgage helps low-income borrowers achieve the goal of homeownership.
The borrower requirements for a Home Possible® loan are also pretty similar to the HomeReady® program. These qualifications include:
- A minimum credit score of
- A minimum 3% down payment
- Income that’s less than or equal to 80% of your county’s AMI, which can be determined through Freddie Mac’s AMI lookup tool
- A maximum loan-to-value (LTV) ratio of 97%
Co-Signer On The Loan
If you don’t meet the requirements to qualify for a mortgage on your own, you could add a co-signer to your loan application. A co-signer on a mortgage is an additional party, like a trusted friend, partner or family member, who agrees to take responsibility for the mortgage payments if the primary borrower defaults on the loan.
Adding a co-signer to your mortgage application could be a good option if you don’t have a solid credit history or don’t meet the lender’s income requirements. A co-signer that does have a strong credit score and meets the necessary mortgage requirements can help you qualify for loans with more favorable terms and lower interest rates.
Keep in mind that adding a co-signer to your loan application comes with a lot of responsibility. Make sure you weigh all of your options before recruiting help from a potential co-signer.
The Pros And Cons Of Buying A House As A Recent College Grad
Buying a house straight out of college comes with its share of advantages and disadvantages. Let’s go over some of the pros and cons to determine whether home buying is the right move for you.
Some of the advantages of buying property as a new college grad include that it can help you:
- Build home equity: Home equity is the amount of money you’ve already paid off on your mortgage loan. It represents the amount of your house that you own. Building equity is beneficial since you can access that money later on if you decide to make home renovations, pay off debt (like student loan debt) or get rid of PMI.
- Invest for the future: Compared to renting, buying a house can be a smart investment strategy. You’ll save money on rent payments when you buy, and instead of making payments to a landlord, you’re putting money toward the equity in your home. Buying a house can also be a smart financial decision if you plan to fix it up and sell it down the road.
- Receive tax deductions: You may also benefit from certain tax deductions as a homeowner. Depending on your location and specific qualifying factors, you may take advantage of tax breaks like the mortgage interest deduction or property tax deduction. Check out the Internal Revenue Service (IRS) website for more information on homeowner tax deductions.
If you just graduated college, buying a house can have a few downsides. Some of the cons of becoming a homeowner as a new grad include that the process can:
- Deplete your savings: Buying a house can be an expensive process. If you don’t have the funds set aside for the upfront costs, like a down payment, you might have to tap into a savings account. You could risk exhausting your savings entirely when you buy a house.
- Limit mobility: A home purchase often means putting down roots in that area. You won’t have the ability to pack everything up and move like you would with a rental. Buying a house can also limit your job opportunities, especially if you need to do the work in-person or go into an office.
- Postpone your future plans: If the majority of your existing funds are going toward homeownership, you might have to put other life plans on hold. Things like going to graduate school, buying a new car or planning a wedding might have to take a backseat in the meantime.
How To Buy A House As A New College Graduate: 4 Tips
Are you considering buying a house after college graduation? Follow these four tips to help you through the home buying process:
1. Secure Mortgage Preapproval
Mortgage preapproval is a document from your mortgage lender that tells you how much money you can borrow to buy a house. Also known as initial mortgage approval, the mortgage preapproval process helps home buyers understand how much house they can afford before they check out properties for sale.
Mortgage preapproval may be a particularly important step for new grads who have a short credit history or are still looking for a new job out of college. It gives post-grad buyers the confidence that they’re looking at houses they can afford.
2. Consider Down Payment Assistance
If you don’t have the funds saved for a substantial down payment on a house, consider exploring down payment assistance options. Down payment assistance, which can come in the form of grants, loans and other programs, helps first-time home buyers pay for the down payment on their house.
It’s entirely possible to own a house with down payment assistance. Check out programs through HUD, your state and local housing authorities and any nonprofit organizations to see what you qualify for.
3. Work With An Experienced Real Estate Agent
As a first-time home buyer out of college, recruiting help from a professional real estate agent can make the home buying process a lot smoother. Real estate agents are knowledgeable about the local housing market and can help you secure the best house at your price point.
Some of the duties of a real estate agent include the following:
- Locating properties for sale through tools like the multiple listing service (MLS)
- Negotiating with sellers for the best home offer
- Guiding you through the mortgage process
- Organizing and filling out paperwork when you close on a house
4. Make Sure It’s The Right Decision For You
The home buying process can be as overwhelming as it is rewarding. Before browsing real estate listings, make sure you’re financially prepared for the costs of buying a house. Check your credit report, do your research into mortgage and down payment assistance programs and evaluate your personal finances to ensure you can cover the monthly payments (and other expenses) that come with home buying.
If you aren’t ready to buy a house straight out of college, there’s no harm in waiting until you’ve saved for a down payment or built up your credit profile. It’s a big decision, so you’ll want to make sure it’s the right one for you.
The Bottom Line: Consider All Your Options When Buying As A New Grad
Buying a house right after college can be a great decision if you’re prepared for the process ahead. New grads who have good credit, a steady income and substantial savings may be able to qualify for better loan terms and mortgage rates than those who are lacking in these areas.
Of course, there are loan and down payment assistance programs available to borrowers, like recent grads, who want to buy but don’t meet some of the requirements for traditional mortgage loans.
Are you ready to buy a house as a recent grad? Apply for a mortgage with Rocket Mortgage® and see how you qualify today.
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