If you are tired of the apartment life and are ready to buy a home right out of college, you have your work cut out for you. Buying a home is a great investment, but it also requires a lot of due diligence on your part.
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Not only do you have to figure out where you want to live and what you can afford, you have to be able to secure a mortgage. While this step might be a bit intimidating, it’s not impossible for new college graduates.
Here are a few tips to help you make the home buying process a possibility right out of college.
Save Money Early
Don’t wait until the last minute to start saving money for the down payment and closing costs. Instead, save as much as you can as early as you can. There are a few programs that allow you to make small down payments or even no down payment. But, either way, you’ll have to pay closing costs, so you’ll need cash available.
The more money you have saved, the better your chances of approval become. Lenders look at down payments as an investment in the home. If you have your own money invested, you are more likely to work hard to make ends meet and make your mortgage payments on time.
Reduce Your Debts
Lenders are going to look closely at your debt ratio. This is the amount of your monthly income that’s accounted for with existing debts. You want that debt ratio to be as low as possible when you are first starting out. Aside from student loans, you should try to eliminate any credit card debt or personal loans you have outstanding.
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The lender will have to include your student loans in your debt ratio even if they are in deferment. The lender will use the payment that reports on your credit report or a payment you prove with your statements. If no payment can be found, the lender will usually use 1% of the loan balance as the payment.
Straighten Out Your Credit
Your credit is one of the most important factors when trying to secure a loan right out of college. Lenders want to see a good credit score with a pattern of timely payments in your credit history. It’s a good idea to start establishing your credit while you are in college by taking out a few credit cards, if you don’t have any student loans. It takes a few trade lines to establish a credit history, though. If you only have one trade line, a lender won’t have enough evidence of your ability to manage your debts.
Of course, if you have too much debt or you don’t pay your bills on time, it will work against you, as you’ll have a low credit score and a poor credit history. It’s a good idea to pull your credit report at least six months to a year before you plan to apply for the mortgage to determine if you need to work on your credit score at all.
Check Out Government Loan Programs
Your best bet when applying for a mortgage right after college is to try the FHA loan. This program only requires a 3.5% down payment and has flexible underwriting guidelines. With a 580 credit score, 31% housing ratio, and 43% total debt ratio, you could be on your way to home ownership.
If you don’t have 3.5% to put down and you don’t mind living in a rural area, you may even be able to secure USDA financing, which provides 100% financing on a modest home. For either of these two loan options, you will pay mortgage insurance for the life of the loan, so make sure you figure that cost into your budget.
Start Small
Owning a home is a big deal and paying the mortgage for the next 30 years is an even bigger deal. Don’t jump in over your head. Instead, buy a home that you can comfortably afford and take care of on your own. A home requires a lot of maintenance and upkeep, which also costs money. You should figure around 1% of your home’s value for annual maintenance and upkeep, plus the labor and time necessary to do it.
It’s possible to start your investment in a home right out of college if you take the right steps. You need to prove that you are a responsible consumer that will pay your bills and manage your home with care. With a decent credit history, good income, low debt ratio, and a little money, you could find yourself being a new, proud homeowner.
