Are you a new college graduate (or a concerned parent) wondering if it is possible to buy a house? Spoiler alert: It is absolutely possible!
It may be easier for someone further along in life, with a more established financial situation, but that does not mean you have no chance of qualifying for your first mortgage right out of college. There are many tactics that college students can actively pursue to improve their financial position, and they can continue the momentum into what I believe to be the best driver for long-term wealth: real estate investing.
Even if you feel like you are not in a position to buy your first house, there will be plenty of tips on what you can do today to start improving your financial position and have far fewer worries when talking to a lender.
What Are the Barriers to Buying My First House?
As a college student, you were likely scraping by month-to-month during the semester, saving up a few thousand dollars when you’d work over the summers in a full-time, seasonal role. Well, at least that’s what I was doing four years ago when I had no money, no assets, and very little imagination about what opportunities would be available.
You will have the same opportunity as any other buyer in the market to qualify to buy a home, but it will certainly be more challenging. But that does not mean that you cannot do it!
You’re likely already aware of some of the barriers to buying a house as a new graduate, like having a limited credit history, a high debt-to-income ratio, and limited savings. Of course, if you read or listen to the news today, you will be completely turned off by the idea of adding more debt to your balance sheet with a new mortgage. All you’ve heard consistently is:
- “Home prices are way too high. Wait for the crash!”
- “Wait for interest rates to come down. I’ve never seen them this high in my life!”
- “Inflation is not slowing down, making it impossible to achieve the American Dream.”
Here’s a look at each of these barriers and how to overcome them.
Limited credit history
Being young, you will likely have very few expenses, which is a great thing for your personal finances, but having no regular payments on a consistent basis will not affect your credit score. There are a few payments that you may have already made that have established your credit history.
Do you have an existing car loan that you’ve made payments on? Making monthly payments on a car could help your credit status. Also, having an active credit card in your name can improve your score as well. Lastly, if you lived in an off-campus apartment and made rent and utility payments, that should help your score!
I did not have any car payments when I was a college student, but having a credit card with a very low credit limit ($2,000 or less) for my groceries improved my credit score dramatically with on-time payments.
Another regular expense I would encourage you to set up in your name is utility bills. This is not a huge expense and will be one for likely the rest of your life. It’s a good habit to start paying recurring bills on time directly in your name.
Limited savings
You likely have only worked summer jobs, internships, and part-time jobs on campus that did not bring in substantial income.
One of the most common misconceptions that I hear is that you need to have a 20% down payment. The average median sales price of homes sold in the U.S. was $420,800 in Q1 2024. Saving 20% or just under $85,000 ($84,160, to be exact) could take you years, which makes it feel like the dream of homeownership is a long shot at best.
Did you know that you can put 3.5% down on a FHA loan and even 3% down on a conventional loan with higher credit requirements? Let’s go the FHA route at 3.5% because you likely do not have the best credit score at your age. If you put 3.5% down on a $300,000 home, you will need $10,500. Sounds much more attainable, right?
I know this number still sounds like it will take a really long time to achieve, but with only student loans as monthly expenses, how much are you able to save on a monthly basis?
According to the National Association of Colleges and Employers, the average projected starting salary in the U.S. for the class of 2024 at the bachelor’s degree level is $68,516. This means you will earn $5,710 gross monthly, will have a few hundred dollars of student loans, and have your first big-boy/big-girl check in hand.
If housing is too expensive to rapidly increase your savings, are you able to sacrifice the next four to five months living at home to save up your down payment? If you take one quarter out of the year to set up your foundation, you can save close to $20,000 and have the dream of homeownership on the horizon.
High debt-to-income ratio
Buying a home with outstanding student loans is absolutely possible. When you talk to a lender, one of the biggest requirements they will look for is a low debt-to-income ratio.
Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it’s the percentage of your gross monthly income (before taxes) that goes toward payments for rent, mortgage, credit cards, car loans, or other debt. According to the FHA, the relationship of total obligations to income is considered acceptable if the total mortgage payment and all recurring monthly obligations do not exceed 43% of the gross effective income.
Let’s go back to the average projected monthly gross income of $5,710 and break that down further into a hypothetical mortgage approval. With your starting salary at $68,516, your maximum monthly housing expense would be $2,455.
Now I understand that at this writing, interest rates are hovering around 6.5% to 7%, which is one of the driving factors in your affordability. I have done a little bit of extra analysis with the BiggerPockets mortgage calculator to help you understand how much you can actually afford:
Analysis of a 30-year mortgage
- Purchase Price: $300,000
- Down Payment: $10,500
- Interest Rate: 6.5%
- Total Monthly Payment (PITI): $2,329.83
- Principal and Interest Payment (PI): $1,829.83
- Taxes & Insurance Payment (TI): $500
Debt-to-income ratio: $2,329.83 monthly debt /$5,710 monthly income x 100 = 40.8%
What Options Are Available to Me?
So, what can a young prospective homebuyer do? Consider these options.
Apply for income-driven repayment
If you have federal student loans, applying for an income-driven repayment (IDR) plan is one way you can lower your monthly expenses. These plans base your payment amount on your household size and income. In some cases, payments can be as low as $0.
This is number one on my list by an absolute landslide. After seeing my own sister successfully reduce her monthly student loan expenses after being approved for an IDR, she was able to comfortably qualify for her first mortgage.
I won’t go into exact numbers here, but she is a physical therapist, and professional school was certainly not cheap after undergrad. Now, she makes a great living and has her first home with her husband, with a very modest monthly expense to continue paying off her student loans.
Needless to say, student loans did not stop her from acquiring her first house, and she works her dream job day in and day out, assisting hundreds of patients annually. You can absolutely have your cake and eat it, too.
Apply with a co-borrower
Applying with a co-borrower means that your lender will consider both applicants’ DTIs. When you qualify with a co-borrower, the lender will use the lowest median credit score of all co-borrowers on the loan, so this is only going to really positively affect you if DTI is the barrier to entry. You still need to work on improving your credit score if you are worried!
It can be extremely advantageous to apply with a spouse, partner, family member, or friend, with all parties fully understanding the upside and downside of what a co-borrower’s responsibility is.
A co-borrower is someone who applies for a loan with you and shares joint responsibility for repaying the loan. Both borrowers on the application are responsible for repayment.
This sounds like only bad news for the co-borrower, but if you are able to structure a deal to benefit both parties, you can create a situation where everyone wins.
How have I done this? I have a co-borrower on my second property due to my DTI not qualifying for an additional monthly payment! My co-borrower has no money into the deal, but without having their name on the loan (and title), there is no way I would have been able to qualify.
I gave up equity to close on the deal and have an agreement on an aligned time horizon for refinancing or selling the property to free up my co-borrower, removing the debt and responsibility in their name. I did this because I was closing on a property only 11 months after closing on my first home, and I had no rental income on a tax return yet to offset my first mortgage.
On paper, a lender looked at my monthly expenses (not including any rental income) and denied my initial request to take on another mortgage! Having a high credit score, money saved up for a down payment, and having a co-borrower to improve my DTI checked off all the necessary boxes to move the deal forward.
We are two years into the partnership, and though I have been the only one to immediately see a return, the more this property appreciates over time will only benefit my co-borrower, leading to a nice payday in a few years. Ultimately, they will make an infinite return by having no money in the deal and allowing me to use their name!
House hacking
House hacking refers to using your primary residence as a rental property and is, in my humble opinion, an option available to anyone leading you toward the path of financial freedom in the most impactful way. The income you receive can minimize your mortgage payment, maybe offset your mortgage, or put cash flow in your pocket just to live! It’s the simplest way to become a real estate investor and an easy way to improve your monthly cash flow.
For example, I bought a three-bedroom condo, paying $1,500 a month in total housing expenses, and used my two additional rooms for rental income. My tenants each paid $750, and I lived there for free while also building equity.
I get asked almost every week: “If you could start over, what would you change?”
I don’t have any regrets to date on my investing journey, but one thing I really wish I had done starting out was to pursue house hacking multifamily properties instead of single-family homes. I have seen almost every benefit that a multifamily house hacker would have except for my acceleration to scale using the rental income from my primary residence.
As mentioned, I needed a co-borrower to continue scaling my portfolio at a more rapid pace due to DTI restrictions caused by my inability to offset my mortgage with rental income.
If you have the ability to pursue a small multifamily property (two to four) units, you are able to use 75% of the gross monthly rent or gross monthly market rent to help offset any DTI concerns.
In my example, I show you the possibilities of using an FHA loan at 3.5% down, but recently, there has been a much more lucrative product announced by Fannie Mae. On Nov. 18, 2023, Fannie Mae began accepting 5% down payments for owner-occupied two-, three-, and four-unit homes.
House hack three to four owner-occupied small multifamily properties over the next five to six years, and I guarantee you will be a millionaire before you hit 30. Giving up the white picket fence as your first home to focus on your financial position for the long haul will provide you with massive opportunities in the future to find your dream house.
Final Thoughts
Do not let these barriers stop you from building your financial foundation. Let them be the toughest obstacles you will face in your financial life, and I guarantee you will see financial goals start to grow and your position improve dramatically year over year.
You are young, have a limitless amount of opportunity, and if you had the drive to successfully complete a vigorous education over the last four years, there is absolutely no doubt in my mind that you will be able to buy your first home right out of college. Money may not be rolling in as fast as you imagined it would in your first job. Use one of your first real-world experiences and “slap in the face” light your fire to improve your financial position—on your terms and in your control.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
