Should I Buy A House For My College Student?

This year my oldest child Jacob left home to attend a university in a different town. His school requires that he live on campus for the first year but, after year one, he's allowed to live anywhere he chooses.

Many of my friends with college aged kids have asked if we're going to have him rent a place after this year or if we're going to have him buy a house. I have been a mortgage lender for fifteen years and a real estate investor for twelve so I have a unique understanding of finances and housing. They're curious about whether I feel buying is worth it for such a short term. 

Will MYCollege Student Rent Or Buy?

So...knowing what I know about the industry, will I have my college student buy or rent? 

Buy. We definitely plan on having him buy. Because he will only be living in the home for a short period, though, we will be strategic with his buying. Here are the key pieces to make this work.

Making the Student The Buyer

Our family is anti-debt but I've seen enough young people who want to buy a home but can't qualify or get good terms because they didn't build the necessary credit history. To keep that from happening here, Jacob opened a credit card the week after his eighteenth birthday and another about six months later. He barely uses them (gas only, paid off each month) but now, at nineteen, he has a solid credit score which will help him qualify for a mortgage.

Why does this matter? Two reasons. First, if he can qualify as the primary buyer, the terms of the loan will be better. He can put less down (as low as 3% sometimes) and the interest rate and mortgage insurance cost will be less because he is an owner-occupant.

If the parent buys a home for the student to live in and the student is not on the loan, the house is viewed as in investment property for the parents. Investment properties require a 20% down payment and have a higher interest rate than an owner-occupant loan has.

The second reason that it's good to have the student on the loan is because of the way property taxes work. In our state, property taxes are lower for an owner-occupant than they are for an investor. They tend to be about double for investors which increases the housing cost.

But wait...what about income? Many students have little to no income so they wouldn't qualify for a mortgage, would they?  

That's where the parents come in. There are many loan options today that would allow the student to buy as the primary borrower with the parent(s) as a non-occupying co-borrower. The student has to qualify credit wise (that's why building that credit score was important) but the actual approval is based on the parent's income, not the student's.

Consider the Sale When You Buy

Even with the lower monthly payment that comes with an owner-occupant, it still may not make sense to buy and sell in a short period of time though. When a person gets a mortgage to buy a house, there are costs involved which are referred to as closing costs. Those costs are different in different places but tend to run around $2,000 in my market.

Those closing costs need covered upfront. When the time comes to sell the house, there will be even more costs that need covered. Jacob will likely have $1,000ish of closing costs at the time of sale and a 6% Realtor commission that needs paid from his profits.

People get burned when they buy a house for a short period of time and don't take these costs into consideration upfront. It's important to make sure you're buying in an area that appreciates at a rate that lets you cover those costs without losing money.

In Jacob's case, he should be ok. If he bought a house for $150,000 and it went up in value 3.5% each year (a normal appreciation level in his college town), the house should be worth $166,000 after three years. If it cost 8% of the price to cover his Realtor and closing costs, he would net $153,000 at sale time so he would come out slightly ahead.

Another option would be to arrange for lender paid costs at the front end to further reduce the fixed costs. Lenders sometimes have the ability to charge a buyer a slightly higher interest rate over the life of the loan and, in exchange, cover the upfront closing costs. Seeing this is going to be a relatively short-term loan, that option likely will make good financial sense.

Living Rent Free

If our student is going to buy a house and potentially make no money when he sells it, though, why would we even bother? The advantage of owning during college is typically not in the profit at sale. The advantage is in the monthly cost for housing.  

Here is what we're planning on for Jake. He is looking for a three bedroom house near campus.  He will take one bedroom and rent out the two others to other students. If he bought a $150,000 home and put 5% down, his monthly payment would likely be around $1,000 per month with taxes and insurance included. If he charged $500 per room per month, that would cover the full mortgage, essentially letting him live rent free.

Plus...Loan Amortization!

Another important piece to consider is that the mortgage loan is getting paid down each month with that payment. If Jacob used a 30 year loan and borrowed $142,500 upfront (95% of the $150,000 price), his balance would be about $135,000 when he went to sell the house three years later. This extra $7,500 cushion will either cover him if the market didn't appreciate as well as expected or it will be a profit for him at sale time.

What I Would Tweak

So...does it make sense to buy?  Yes, in our case it does. If your student hasn't been able to build a credit score, if your market has higher costs at the front or back end, if you don't think you can find good roommates to cover the payment, yada yada then maybe it wouldn't for you. For Jacob though, it makes financial sense.

There is one thing we're going to tweak though. Jacob will not be having a 30 year mortgage.  Instead, he'll be having a 15 year one.

The Beauty Of The 15 Year Mortgage

A 15 year term is a better option for three reasons. First, the interest rate is lower. Right now, the interest rate is about 0.5% lower when you choose the shorter term.  Secondly, the mortgage insurance is cheaper.  Mortgage insurance is something you typically pay as part of your loan payment if you don't put 20% down. With a shorter term, the cost for it drops.

Lastly, the loan gets paid down ALOT faster with a 15 year term.  While I estimated the balance owed at $135,000 after three years with a 30 year loan, it's only $120,800 with a 15 year loan.  That's over $14,000 more that will go in our student's pocket when he sells the house.

But won't a 15 year term make the payment higher? Yes, it will. In this scenario, the mortgage payment will be about $300 more per month. That adds up to less than the increased profit at sales time though ($300 per month x 36 months=$10,800) so it financially just makes sense.

Again, buying makes financial sense in our situation. It may not in yours. How do you know if you don't check though? If you're considering your options in Indiana or Michigan, I'd be happy to help you crunch the numbers. Just give me a call or drop me a line at lori.hiscock@ruoff.com.

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182

How To Win In A Bidding War

It's practically an epidemic in our current housing market.  A buyer finds a house they really like - one that's only been on the market for a couple of days many times - and they make an offer only to find out that there are other offers on the table and theirs isn't the winning one.

It's a rotten situation.  It's even worse when it happens multiple times, which has been the case for a lot of potential home buyers in Michiana.

What if I told you there was a mortgage loan option that would make your offer better and help you to win in this tight market?  There is, and it's called the Ruoff 3 for 1 Program.

What is the Ruoff 3 for 1 Program?

You're going to love this loan option.  The Ruoff 3 for 1 Program is a conventional mortgage that eligible buyers can use and only put 1% down on the purchase of their home.  That's right.  Just 1% of the price is needed for the down payment.

Tell me more.  But first, what do you mean by 'Conventional Mortgage'?

Before I break down the details of the 3 for 1 and how it will make your offer better, let me clarify what I mean by 'conventional mortgage'. In a nutshell, there are two basic types of mortgage loans, government insured loans and conventional loans.  Government insured loans typically offer extra flexibility so they're a good fit for some people but that flexibility comes at a cost of higher fees and/or mortgage insurance being charged for the life of the loan.

If you don't need the flexibility they offer, it's better to skip the extra costs and just go with the plain-vanilla conventional loan.  To learn more about why I prefer conventional for most buyers, click here - Why I (almost) Always Recommend Conventional.

So Who Can Buy With 1% Down?

Conventional loans typically require 5% down but we've had an increase in 3% down options coming on the market lately.  The Ruoff 3 for 1 Program technically is a 3% down option too.  In this case, though, 2% of that 3% down payment is paid by Ruoff, leaving only 1% to be paid by the home buyer.

Let's take a minute to hit the high points on what is needed to qualify:

1. Credit score - A 680 minimum credit score is needed.
2. No first time buyer requirement - You do NOT need to be first time buyers (yes!). However, you can't own another house at the time of the loan closing and you will need to take an online home buyer education class.  Don't worry.  It's not hard.  
3. Purchases only - This is for a purchase only (not a refinance of an existing loan) and that purchase has to be of a single family home.  No rental properties, duplexes or manufactured homes are allowed.
4. No minimum personal investment or savings required - While you need 1% down, it can be a gift from a family member if needed. This loan also doesn't require any level of additional savings like some loans do, making it even easier to qualify.
5. Some maximum income limits - Some areas have a maximum income limit meaning that you can't make more than the HUD median Income for that area or you won't qualify.  About 1/3 of our market has no income cap while the rest has a current cap of $52,900.  To see if a cap applies to the house you like, go here - Property Lookup.  

One key thing to know about the income cap - it only applies to the borrower on the mortgage and not to the household.  If there are two people buying a home together and combined they make too much money but alone one of them makes less than the cap, we can look to see if that person qualifies alone so they can use the program.  Both people could still be on the deed to the house in this situation.

So How Does This Make My Offer Better?

I'm happy to explain!  First, the fact that this is a conventional loan makes a difference.  All things being equal, most sellers feel more comfortable with a conventional buyer.  The general impression is that a conventional buyer has a stronger financial picture and will be more likely to close.  Also, conventional loans have lighter property requirements which make sellers more comfortable.

The best way to use this program, though, relates to seller concessions.  It's a common thing for buyers to ask a seller to help cover closing costs on a purchase.  Buyers typically ask for this because they are using their savings to cover the down payment and can't cover both.  If you only need 1% of the price for your down payment though, you can likely cover your own closing costs instead of asking the seller to cover them.  This makes your offer look better when compared to another buyer who is asking for seller help.

Interested?

Of course you're interested!  While Ruoff's 3 for 1 Program isn't a fit for everyone, it's a fit for a whoooole lot of people who are ready to buy now and quit playing the 'someone beat us out' game.  If you'd like to dig deeper to see if this program could help make your offer the winning offer, drop me a line at lori.hiscock@ruoff.com or give me a call at 574-234-5201.

To learn more about low down payment options or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182

Can I Buy A House With My Income Tax Refund?

If you're anything like me, you probably start thinking about what you could do with your tax refund months before tax time even hits. Should I pay something off? Take a family trip? Save it for a rainy day?

There are lots of uses for that tax refund money, most of which you'd forget about soon after it was spent.

But...hey, what if you could do something with that money that would change your life?  Is it possible that you could buy a HOUSE with your tax refund?

Yes, you likely could get into a house of your own with your tax refund.

Let's talk about how.

3% Down Conventional

First let me say, there is no 'one size fits all' mortgage type. Some buyers get the most benefit from USDA financing, some from VA, some from FHA and some from conventional. For the majority of my home buyers, though, a conventional mortgage offers the most financial benefits. 

(To learn more about why conventional financing rocks,

click here - Why I (almost) Always Recommend Conventional.)

In 2016, the requirements for getting a conventional loan lightened with the minimum down payment dropping from 5% of the price to 3% for many buyers, making it an even better option than it was before.  Suddenly a buyer could get all the benefits of a conventional loan (no financed fee, removable PMI, easier home buying process) without having to invest too much upfront.

(To learn about my favorite 3% down conventional option, 

click here - The Loan I would ABSOLUTELY Pick Today.)

Conventional loans have one unique thing that needs to be considered when trying to buy a house with less money needed upfront, though - the seller concessions cap.

Maximum Seller Concessions

When you're buying a house, you are allowed to ask the seller to help pay for the costs you incur with getting the loan. They can also pay for the items that need covered upfront with a home purchase, like your first year of home insurance and your insurance and tax escrows. Together, these items are typically referred to as 'closing costs and prepaids.'

The seller can't always pay for all of these for you, though. It depends on the price of the home you are buying and the type of loan you are getting. The amount the seller can give is capped as a percentage of the sales price and the percentage allowed is different for different types of loans.

For conventional loans, the most the seller can give is 3% of the price. On lower priced homes (houses under $110,000ish), this will likely not cover all of the costs so you, the buyer, will have to pay for the rest.

Show Me The Numbers Please...

Are you a numbers nerd like me who loves a good chart?  If so, I've got your back!  Here's a table showing how much the buyer would need for the down payment and closing costs/prepaids assuming the seller agreed to pay the maximum that is allowed towards the buyer's cost.  As you can see, the amount the buyer needs stays the same even if the price is lower simply because the seller can't cover all the closing costs on a lower priced home.

Home Price	3% Down Payment	Typical Closing Costs/Prepaids	Max Seller Can Contribute (3%)	Amount Needed By Buyer
75,000	2,250	3,300	2,250	3,300
100,000	3,000	3,300	3,000	3,300
125,000	3,750	3,300	3,300	3,750
150,000	4,500	3,300	3,300	4,500

3.5% Down FHA

If you're wanting to buy a lower priced house but can't spend as much upfront as the conventional loan needs, a FHA mortgage might be the better fit.

FHA financing only needs 3.5% down, so not much more than the conventional option, and the seller is allowed to give up to 6% of the price towards your closing costs and prepaids. The seller being able to give more can keep the upfront amount needed on the lower priced house to a more affordable range for many buyers:

Home Price	3.5% Down Payment	Typical Closing Costs/Prepaids	Max Seller Can Contribute (6%)	Amount Needed By Buyer
75,000	2,625	3,300	3,300	2,625
100,000	3,500	3,300	3,300	3,500
125,000	4,375	3,300	3,300	4,375
150,000	5,250	3,300	3,300	5,250

IHCDA Next Home

If your tax refund still isn't going to cover the amount needed, you aren't out of the home buying game yet. At that point, we'd see if you could qualify for down payment assistance from IHCDA.

IHCDA stands for Indiana Housing and Community Development Authority. It is a department of the Indiana state government that provides eligible home buyers with down payment assistance. Because of the help provided by IHCDA, many buyers can purchase a home needing only $500-$1,000 to cover the upfront earnest money. They often get that earnest money back at closing too, making this a truly zero down home buying option.   

(To learn about the downsides to this down payment assistance program.

click here - The Downside of Down Payment Assistance.) 

Bottom Line

If none of the options above are a fit for you, there still might be other ways to cover your down payment. Gifts from relatives are often allowable sources as are loans against something you own like a 401(k) or a vehicle.  

Bottom line, there's likely a way to cover your down payment at any time of the year. This time of year with that tax refund money flowing in, though, it might be easier than most.

So...are you wondering if this might be the right time for YOU to buy a house?  I'd be happy to help you figure that out!  Just give me a call or drop me a line at lori.hiscock@ruoff.com.  Together, we'll see if 2017 might be your year to own a home of your own.

To learn more about low down payment options or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182