Recent college or university graduates are not usually considered prime candidates for home ownership. While their prospects for gaining meaningful employment may be better, they also come with a series of short-term problems that can make immediate homeownership challenging.
Aside from normal issues, many are now saddled with college loan debt in entry-level jobs, which tips the scales against them in several areas.
For some, post-graduation is an attractive time to buy a home. Many young people get married during college or shortly after graduating and want to set up a household with two incomes to pay the bills.
Those who have completed graduate school may have secured a well-paying, professional position they intend to remain in for some time. They often have relatively little student debt, owing to paying their way through school on graduate assistantships.
However, while it is challenging, homeownership can still be within reach. It may take a while to position yourself better.
Homebuying Challenges For Recent Grads
Here are some factors that can make it more challenging for new grads looking to buy a house.
Lack Of Income
Most lenders have income requirements when evaluating mortgage applications, including a good employment track record. As a new grad, you may not have established your career yet, but that doesn’t matter to a lender who only weighs real risks and not a potentially rosy future.
The single biggest key to loan approval is that your lender will want to ensure you have the funds to make your monthly mortgage payments before approving you for a loan.
Depending on the lender, you may be able to provide your college transcripts for the last two years to make up for a lack of past employment.
For most loans, you’ll need to come up with a down payment and be able to pay closing costs of 2-6%. You must also demonstrate you have enough reserves in case you hit a financial bump in the road.
Recent grads are challenged on both fronts. Those upfront costs can be killers, and unless you have other sources to assist you with initial costs, you may need to step back for a while until you have deeper reserves built up.
A High DTI
Your debt-to-income ratio (DTI) is a critical determining factor for loan approval. It is expressed as a percentage that compares your spending on monthly debt payments to your monthly income.
Most lenders prefer mortgage applicants with a DTI of 43% or less. Anything higher than that is a red flag to the lender because it increases the risk you won’t meet your mortgage obligation.
Part of the issue for new grads is for those who have college loans, which can completely skew your DTI for years until those loans are paid off.
Limited Credit History
Your credit history is one of the primary determining factors for loan approval. Your payment history provides valuable insights as to how you’ll handle paying back a loan in the future.
The length of your credit history is also folded into your FICO Score. Ten or twenty years of perfect debt repayments carry much more weight than two years or less.
Aside from making all your payments on time now, you should also pull your credit report and see if there are any blemishes or errors you need to address. Fix them before applying for a mortgage.
Specific terms vary, but in most cases, you’ll need a credit score of at least 620 to qualify for a mortgage.
Homebuying Strategies for Recent Grads
First-Time Homebuyer Programs
Several states understand the struggle to buy your first home, and that’s why many offer programs to help with a downpayment. Many of these programs are for anyone who hasn’t owned a home in the past three years and could consist of a grant or low-cost loan.
In some cases, if you reach a certain threshold of payments, the loan won’t have to be paid back.
Ask a realtor or contact your county or state housing authority to see what programs are offered. Understand that they tend to be popular with demand outstripping available funds. You may need to apply or get put on a waiting list before you can access funds.
Special Alumni Deals
Another way to save on a home loan is through your university credit union. Even if you didn’t join as a student, most university credit unions are still open to alumni. They may offer better mortgage terms than you can find on the commercial market and special programs for alumni.
And don’t forget about your alumni association. Many alumni groups have arranged for special insurance rates for their members, which can add up to several hundred dollars a year on home insurance.
Low and Moderate Income Assistance
Many states and the federal Department of Housing and Urban Development have mortgage assistance programs specifically targeted toward low- and middle-income earners, particularly first-time homebuyers.
Some of these work in conjunction with FHA loans, which can be a good deal for young people who are just starting out and don’t have a lot of money or an established credit history. Also, with an FHA loan, you can count your last two years of college or graduate school as part of your employment history, which can help you qualify for a loan.
When the FHA insures the loan, lenders are more willing to give you the money, even if you don’t meet all the qualifications, because there is less risk for them. The FHA offers flexible guidelines for credit scores, down payment (as little as 3.5%), and debt-to-income ratio, making it an attractive loan program for first-time home buyers.
Fannie Mae policies implemented in 2017 can also help student loan borrowers qualify for a mortgage. For example, Fannie Mae will exclude non-mortgage debts (i.e., student loans, car loans or credit card debt) paid by someone other than the student from consideration in the debt-to-income ratio for a borrower looking to qualify for a mortgage.
Consider a Co-Signer
The bank of mom and dad can be a viable funding option for new grads. Parents often have deeper pockets, and their signature on a loan can spell the difference between approval and disapproval.