I can acutely remember a time when I believed home ownership was a luxury that people like me in high student debt could not afford. (I also felt this way about weddings, kids, and pretty much anything nice/somewhat expensive). I thought “normal” adulthood experiences were off-limits to me, as a punishment for taking on too much student loan debt with an artsy degree with very little hope of return on my investment.
Today I own two properties, both condominiums. One is an investment property in Minnesota that has always been rented out. The other I live in — in Beverly Hills (I recently moved back to the States from Singapore). The investment property is an asset to diversify my investment portfolio while I was living abroad (and consequently could not participate in 401K’s), and as long as I can continue having the tenant pay the mortgage, I will hang on to it.
Let me be clear, first you DO need to have fairly good credit, and you do need some income. Read my blogs about how to repair your credit and increase your income. You can do it. I promise. I did. As long as you have some income and fairly good credit, you can still have high student debt and purchase property. I hate self-help blogs and books that give advice that is way outside the realm of reality. I promise you, it is in the realm of reality that you can purchase a home.
When talking to people with a lot of student loan, I often hear the following excuses for why they cannot possibly afford a house. I call these excuses because they are ideas that have been implanted into debt-ridden individuals minds by their own fear and self-punishing beliefs. Here are the top three. My upcoming book looks at many more, and the way through them to the other side.
#1 – I don’t know if I’m going to live here forever, so it seems like a bad idea.
Why this is dumb — It’s kind of like saying, “I don’t know if I’ll die by being hit by a bus so in the meantime I’ll just smoke, eat lard, and never wear sunscreen.”
Wasting money is wasting money. When you pay rent, you know with 100 percent certainty that money is gone and never coming back. When you pay into a mortgage, you know that the money will likely, in some form, return. It may not all return – the market could go south, there could be some huge repair or a natural disaster that you need to put more money into to fix, or some other circumstance may force you to quickly sell it off for less money than you paid.
Let’s say you buy a $200,000 house in which the monthly mortgage payment is $1500 per month. You put only 3 percent down to buy the house – i.e. $6000 (don’t worry right now if you don’t have six grand lying around, we’ll get to that later) – and your mortgage [loan] is $194,000. You pay the mortgage for a year and then decide to get married and sell the house. It would probably be better in this scenario to rent out the house to continue building equity but let’s assume you are strapped for cash and that’s not an option.
You sell the house for $190,000, $10K less than what you paid for it. Your mortgage [loan] at this point is $176,000, since you have paid off $1500 every month. After paying off the mortgage with the money from the sale, you pocket $14,000 to put towards your new house. Considering the $6,000 you put in when you bought the house, your profit is still $8000. This does not factor in interest and depreciation but you get an idea. If you spent money on home improvements you would presumably be able to sell it for a little more than what you paid, recouping the money.
Had you rented an apartment for $1500 a month instead, you would simply be $18,000 poorer.
#2 – I can’t get a mortgage with my credit and other debt.
Why this is dumb — Perk up, Debbie Downer. Have you been denied on more than five mortgage applications? So how do you know?
First, do follow at least some of my credit repair advice, but you don’t need perfect credit. And you don’t need a broker license to get through this. Just go to your city’s YELP page and enter “mortgage broker”. Scroll down the list of mortgage brokers in your area and read some of their reviews. Pick one or two who have predominantly positive reviews and go to their website’s “Contact” or “Get more info” page. It will probably ask you to submit a few documents – like recent paystubs, W2’s, driver’s license copy, and bank statements. Within a day or so someone should get in touch with you and simply tell you how much house you can afford. They may ask follow up questions like whether you have any money to put down, and whether you can pay down any existing debt. In most states, you need to have a specific debt-to-income ratio that needs to be under a certain threshold for certain types of mortgages. You may be right – perhaps your debt-to-income ratio is not right for you to get a mortgage at this time. But you may learn that there are more options than you realize – different types of home financing options – that are available for your specific situation. All of this costs you nothing.
#3 – I can’t afford a down payment now nor can I save for one.
I had always heard you had to put 20 percent of the purchase price down in cash to buy a house. I thought that was the “standard”. It is not anymore.
While it is always preferable to put down more money to get the lowest mortgage interest rate possible, people are in different situations when it comes to on-hand cash. If you are in the military, a veteran, or a farmer, there are special types of mortgages for you that require no money down. If you have decent credit, you will look for what is called a PMI (Private Mortgage Insurance) to get a mortgage with only 3 percent of the home purchase price down. Also, look into “Bridge Loans”. If you have really bad credit and no money, you can get an FHA. It requires a 3.5 percent down payment on the purchase price of the home. So if the purchase price is $100,000, you need to put down $3500. That said, there are downsides to FHA loans; the terms are not as favorable, and not all houses will sell to buyers financing with FHA loans. Again, this is not for you to worry about now. Let your mortgage broker worry.
All you need to do is start the process — yes, even now while you’re in high student debt. Don’t put it off until you’ve paid the debt off. Only in exploring your options, can you see what the obstacles are. And then you can address them. It may be easier than you think.