A home is probably the largest purchase you'll ever make in your lifetime. It requires a lot of time and discipline. But it's a decision that shouldn't be taken lightly. After all, it costs a lot of money for anyone—even those who work full-time. It can be even tougher for someone who may be paying for college, too. But just because you're a student doesn't mean it's impossible to live the dream. If you're still a student and want to be a homeowner, read on to learn more about what you need to know about being a college-going mortgagor and tips you may be able to use to balance the two.
- Being a college student doesn't disqualify you from getting a mortgage, but consider the costs to your financial situation.
- You'll need a great credit score, down payment, employment and/or income, and a low debt-to-income ratio to qualify for a mortgage.
- HUD offers first-time home buyer programs, while FHA loans come with low interest rates and low down payment requirements.
- You may need a co-signer.
The Costs of Homeownership
According to the St. Louis Federal Reserve Bank research department, the average sale price for a home in the United States was $310,900 in the third quarter of 2019. But remember, this is just the average. Home prices tend to vary dramatically from region to region. For example, if you attend the University of Cincinnati, you’ll be able to find a more affordable home than if you attend New York University and seek an apartment in New York City. In some regions, it may even be possible to buy a home with rooms you can rent out to other students for some extra income. This may end up being cheaper than paying for four or more years of dorm living, and can help you fund your mortgage payments. If you leave the area after graduation, you can sell the house or keep it as a source of rental income.
Living the Dream: Do You Qualify?
Like anyone else, you'll still need to qualify for a mortgage. Unless, of course, you have a handy inheritance or wealthy parents. But let's face it, most of us don't fit into that category. But just because you're a student, doesn't mean you won't qualify. You will still need the same criteria as anyone else to get a mortgage: Great credit score and enough equity to be considered. Keep in mind, though, that many lenders have tightened their requirements for mortgage clients. Depending on the kind of home you purchase and the kind of mortgage loan you get, you'll need to make sure you're gainfully employed—or at least have a form of steady income—and have a fairly low debt-to-income ratio. And don't forget your down payment. If you try to get a conventional mortgage, you'll have to sock away as much as 20% of the total purchase price to put down.
We've tried to make things to simple so you can visualize what you'll need to pay for a mortgage. So here's an example of what some of the costs will be for a $300,000 home, according to realtor.com.
If this scenario is out of your price range, there are other options if you’re a student seeking a home mortgage. Know from the outset that you have to be at least 18—21 in some states—to apply for a loan and purchase a home.
Don't buy a home if it doesn't make financial sense, especially if you're a student.
Home Buying Programs
The U.S. Department of Housing and Urban Development—also called HUD—is charged with creating strong communities with affordable housing for everyone. Created in 1965, the government agency improves homeownership opportunities at more affordable levels. HUD has an abundance of resources as well as special programs for first-time home buyers. It also provides home buyers with state-specific programs for anyone looking to buy a home.
The Federal Housing Administration (FHA) provides mortgage insurance on loans made by special FHA-approved lenders under the HUD umbrella. These lenders are willing to make FHA home loans with lower down payments because of the government guarantee. Unlike conventional mortgages, you may be able to secure a loan as a student with as little as 3.5% of the purchase price to put as a down payment. This, of course, depends on which state you're seeking to make the purchase.
FHA loans may also give you a lower interest rate. Most of these mortgages come with a fixed interest rate, allowing people—including students who qualify—to finance as much as 96.5% of the purchase price of the home. This helps cut down on extra costs like closing costs. It can also help keep your mortgage payments down. You may also qualify for the 203(b) home loan, which allows you to fund 100% of the closing costs from a gift from a relative, government agency, or a nonprofit.
You can look up the FHA mortgage parameters on the HUD website.
Impact of Student Loans
If you have student loans, you can defer payment on the debt while you're in school, which means you're able to reduce your overall debt load as a student. So, it’s possible that when your lender calculates your debt-to-income ratio to determine whether you can afford a mortgage, the future student loan payments may not be factored into the equation. On the other hand, if you’re paying your student loans in a timely manner, this can help create a positive credit profile. You may want to consider using one of the income-driven repayment plans offered by the Federal Student Aid office, which reduce your monthly loan payments. Most federal student loans are eligible for one of these plans.
Consider a Co-Signer
If you're a part-time student and have a job or a working spouse, you may have enough income to qualify for a modest loan. But if you lack sufficient income, you may still qualify for a mortgage with a co-signer. A parent, guardian, or significant other may typically be able to co-sign the mortgage loan if that person has sufficient resources, income, and a satisfactory credit profile. The co-signer on a loan doesn’t receive the loan proceeds but is liable for repayment if you fail to make loan payments. So it's important that you keep up to date with your payments, or risk losing the relationship.
The Bottom Line
Even if you can qualify for a mortgage, that doesn’t mean buying a home is the right decision. For one thing, it requires a number of transaction costs, such as realtor commissions, taxes, fees, and more. If you plan to own your home for a long time, it’s likely that you’ll recoup those initial costs, as your home value appreciates. But if you plan to live in the area for less than five years, you may be financially better off renting or even living in a dorm.
That said, if you have good credit and an income source, and you expect to stay in the area for awhile, buying a home while in school may be a wise decision. Provided you’re willing and able to serve as a landlord, renting out rooms in the home could be a good way to help cover your mortgage. However, as with any major life decision, you should evaluate your lending options and personal situation first.