Buying a house while in graduate school?

[livmoredyles]

Hey you all, I've been lamenting over having to pay rent for the next few years so below is my rant on buying a house vs. paying rent...feel free to contribute:

So if you're getting a PhD you'll be in the same place for 4-6 years most likely paying rent. But rent sucks! It's just money thrown out the window. If I paid only $500/month over a 5 year period that's $30,000 down the drain! BUT if you choose to buy a house (especially with the market being close to a bottom now) you could be paying slightly more for a mortgage, gaining a tax deduction because you have a mortgage, and gaining equity from your home. So instead of leaving with $30k down the drain, you could leave with an extra $30k profit or more!

PROBLEM: My stipend, as I'm sure like many others, sucks! I feel as though I'm being pigeonholed in that I make too little to invest in a home, so I'm forced to throw my money away renting.

Is anyone else going through this dilemma, any advice?

[jaw17]

Have you looked closely at the financial issues around buying and the ways that mortgages are structured? In a 4-6 year timeframe, you probably won't save much money, if at all. There's at least 6% straight up transaction costs of using a realtor (which are directly paid on the selling end) - not even getting into the costs of moving and fixing it up. And then almost all of your monthly mortgage payments for those first few years will be interest down the drain, with only a very small portion actually accumulating as principal. On top of that, most condos have an association fee of a few hundred dollars a month. And finally, owning comes with the unexpected and unbudgeted surprises like a busted heat pump that will cost $3200 to replace in the dead of winter, or an invoice from the condo association for $2800 (12 months later) to contribute to the costs of a roof replacement. That's a lot of uncertainty to accept on a stipend, unless you're fortunate enough to have a lot in savings.

In our case, we've been able to swing it while working in DC for the past 3 years, but will be going back to renting when we move up to Philadelphia (and will lease out our current place in the meantime). Hopefully we can move back down here during our dissertation phases.

UPDATE: I should add that there are, of course, other non-financial reasons to buy a house. In our case, we were able to make it much more of a home - while the fixing up process was expensive and time-consuming, it was also very rewarding. And since we have dearly beloved dog, we didn't have to worry about finding a pet-friendly apartment. But we would be taking a serious financial hit if we had to sell now...and that's with a 20% downpayment.

[rising_star]

I would add to what jaw17 said by pointing out that with the low income of a grad stipend, you won't get much of a tax break from having a mortgage. I've toyed with it for a while but the association fees, insurance, and taxes always discourage me. The only way I would do it is if I found a fixer-upper in May, bought in June, and used July/August to fix it up (I can do lots of housework on my own and could bring my own Project Manager/General Contractor wherever since he's a family friend). Even then... we'll see.

[LaraAnn85]

I thought it said "Buying a horse while in graduate school?" and I got really excited.... :oops:

[luvalicious]

I thought about buying a house, briefly, but I decided I'm not ready yet... then again, I'm also of the mind that I'm not really throwing my money away renting, either, especially for such a (relatively) short period of time. The amount it costs to upkeep a house far outweighs what I pay/will pay in rent, for example, even though like rising_star, I could get a fixer upper and do most of the work myself or with family. In my mind, I'd love to do just that but I know I don't have the time or resources right now.

I do feel the need to make a more 'home-like atmosphere' which white walls don't really give. But I have my ideas

[rising_star]

Has anyone toyed with doing a 5/1 or 7/1 ARM to buy in graduate school rather than a traditional 30-year fixed rate mortgage? Again, I'm not certain about buying but it seems like that would give you the house, you could pay extra towards principal, and most of your payment would be tax-deductible (assuming you make enough). Again, I'm not really pro-home buying unless there's someone else with a steady income that can contribute to the payments.

[studentfromLA]

I think the real issue is not whether it would be a good idea to buy a home while in graduate school, but whether you could even qualify for a mortgage on a graduate student income. The lending market is super-tight right now; most mortgage companies have really heightened their criteria to make loans and are being super-strict with underwriting. Assuming you have a 20% down payment saved, and assuming an average graduate student stipend of $20,000 per year, the most they would qualify you for in a mortgage is around $100,000 (monthly payment of around $583 at an interest rate of 5.8% not including taxes and insurance). So you could buy something for $120,000. If you are going to a school where houses are that cheap, it would probably be a good investment, but I would assume that is NOT the price of houses in most university towns. Now if you have a dual income or a much higher stipend, it might work out, but unless you have an outside source of income, the average graduate student stipend is NOT going to be high enough to qualify for much of a mortgage.

[rising_star]

I think you'd be amazed. I can think of plenty of college towns (and cities) where you could buy something for less than $120K, particularly in the South. For example, Athens, GA, Tallahassee, FL, Atlanta, GA, Columbia, SC, Chapel Hill-Raleigh-Durham, NC, Bloomington, IN, Urbana-Champaign, IL, State College, PA...

[livmoredyles]

I'll be in North Carolina and could get a decent condo for $80,000... However I feel like no one is thinking about the appreciation aspect. Sure you will be paying towards interest however that $80,000 condo or house you bought 4-6 years ago could be worth $120,000 later. So who cares if you mortgage (which would be equal to the same dollar amount as the rent money you'd be throwing away) is solely paying down the interest, when you sell you get to reap the benefits of the appreciation.

Now this is dependent upon when the market hits a bottom of course, which appears to be within the next year or so...but is this making any sense to you all?

[rising_star]

The appreciation angle makes sense but it's not something I'd be counting on. If you're lucky, you'll get a 3-4% annual increase in value. Will that outpace inflation? Would you do better saving extra money for retirement? With a mortgage you have to pay increased insurance costs plus taxes. I've never seen a case where renter's insurance was more expensive than homeowner's insurance.

Condos are known for not appreciating as well as single-family homes. You have to wonder about how good the association is and whether you'll get saddled with an assessment. There are the association fees (I've seen $30-$250) to account for on top of whatever your payment is and the fact that you'll need insurance for the contents inside of your unit. I don't think I'd buy a condo, honestly. Even if the market does improve, you'll be lucky to get your money out, esp with closing costs and all that.

[christina_bme]

Again, I'm not really pro-home buying unless there's someone else with a steady income that can contribute to the payments.

Yeah, I would not even be thinking about it if I were living solely on my grad student stipend. My soon-to-be husband has a "real job." He and I have talked about buying a house. The area is very affordable and we are both tired of apartment living. But things just seem so unstable these days and property taxes in the area are ridiculous. We decided to wait a while and see if the market bottoms out. Plus I think we need time to educate ourselves a bit more on the ins and outs of homebuying/home ownership before we can even call a realtor.

I would stay away from the adjustable rate mortgages. They seem like a good way to get into BIG trouble from everything I am hearing on the news.

[Quarex]

I think you absolutely should buy that horse! They are good with children, provide an easy way to get to campus ... oh, right. I am with you, LaraAnn.

So you could buy something for $120,000. If you are going to a school where houses are that cheap, it would probably be a good investment, but I would assume that is NOT the price of houses in most university towns. Now if you have a dual income or a much higher stipend, it might work out, but unless you have an outside source of income, the average graduate student stipend is NOT going to be high enough to qualify for much of a mortgage.

In addition to what Rising_Star pointed out accurately about the fair number of cheap college towns, you might be further surprised about just how hilarious the housing market is right now. My girlfriend and I found several condos in the Washington D.C. area for only about $150k (now, what is wrong with them? Who knows, but the point is some houses are getting dangerously close, even in at least one high-cost area, to "affordable").

That said, my serious-grown-up-adult-since-age-15 friend who has owned a home since he was in his early-mid 20s, and who always ridicules people for renting, has been renting a place in Chicago for approaching a year now, with his lovely home still sitting unsold back home. Now, sure, once he finally sells it, he will recoup much of the money that living in two places is currently draining from him. But do you really want to deal with the risk of potentially paying two enormous monthly housing bills a month when the market collapses like this? Particularly as a graduate student or recent graduate? Certainly seems like it could be a terrible idea waiting to happen.

[studentfromLA]

Quarex: if you can get into a house/condo for $150,000 or under, are doing a Ph.D. and so are going to be staying in the town for 4+ years, and are NOT carrying a mortgage from another property, I think it would be a great idea to buy (assuming you have the down payment). In the town where I am going, 1 bedroom apartments rent for $700 -- that same $700 would be about the monthly payment on a $100,000 mortgage, and you have to live somewhere while in graduate school, so it might as well be in a place where you get a tax deduction. Now, I would assume that most graduate students don't have $20,000-$50,000 sitting around, but if you do, I think it would be a good investment to buy, if the market in your town is affordable enough. After the 4 or more years of Ph.D. work, it's likely the real estate market will be better. Even if it isn't, a house/condo in a college town will always have a market for renters.

When I made my first post on this subject, my assumption was that there's no way any place has houses for $150,000 and under (I currently live in Los Angeles, so my real estate market value experience is colored by the still HIGH price of housing in the L.A. area). However, since then I have looked at the market in the town where I will be going (Madison, WI), and indeed there are properties close to the school that are selling for under $200,000, so it would not be entirely infeasible to consider buying there.

[rising_star]

In the town where I am going, 1 bedroom apartments rent for $700 -- that same $700 would be about the monthly payment on a $100,000 mortgage, and you have to live somewhere while in graduate school, so it might as well be in a place where you get a tax deduction

There are still taxes and association fees to consider. Not to mention homeowner's insurance and the need to find good maintenance folks that you can trust. And the tax deduction won't help most likely... On a $100K loan with 6.25% interest, you'd pay $5966.59 in interest in one year, which isn't actually much more than the standard deduction, which is $5150 if you're single. So the difference is ~$800 which probably isn't enough to shift your tax bracket...

[lauras]

If we should have learned anything from the past 5 years, it's not to buy a house unless you can afford it.

If you're tired of paying rent, consider being a jigalo, but for the love of g*d, do NOT go get an interest-only 5 year arm :!:

[timuralp]

Well, the buying really depends on where you are and how much it is. In the state I recently moved to, I managed to get a pretty big one bedroom condo for 75k. The payments on it end up being around 800/month, which is similar to what you'd pay for a one bedroom apartment if you were renting. From this standpoint it makes sense for me to be a homeowner, since it's affordable and I can sell it when I leave after 6-7 years.

[candy rain]

of course you can buy a house if you can afford it,majority it depends on your family condition. but there is something you should consider,your instable furture make you should consider it prutentially.

[bethanygm]

My biggest concern would be whether or not we could afford the repairs if anything major (or even minor) happens to our house. I would love to buy one (and we have the VA loan to help us), but it would be very hard and very stressful to come up with the money needed if our roof decided to start leaking or something. Do we really need that when we are working toward degrees? Probably not. It is probably better to rent for a few more years, keep putting money into savings, and get a house when we find out where we are living after school.

If your SO has a steady, well-paying job, then go for it. Mine will be in college (using his GI Bill) still.

[twocosmicfish]

Some things to remember right now - both prices and rates are at or near historical lows, there are big federal incentives (up to $8k in cash!), and many homes have been on the market so long that people are falling over each other to cut prices even further. If you are going into an area with a reasonable market, you may be able to find something, and that cash form the government can be held onto as a reserve against maintenance costs.

[mmt27]

I was wondering how everyone is qualifying for their loan. I will have a stipend of $23,000 next year. I could have used my current income to qualify if I were going to school in the same city, but because I'm moving from Boston to Chicago, I have to use my future income. Unfortunately, because I don't get a W-2 form for my stipend, the bank said I am considered "self-employed," even though my stipend is guaranteed all 5 years. The loan officer informed me that people who are self-employed have to be self-employed for 2 years before they will qualify for a new home loan. For those of you considering buying a house or who have bought a house while in graduate school, how did you get around this?

[jasper.milvain]

My husband and I recently went on our first condo hunting trip in my PhD city. Surprisingly, when we went to get pre-qualified, the bank accepted my funding offer as stable income no problem, but wanted more assurances about my husband's job (he has worked for a big, stable, national company for four years). Didn't see that one coming.

We're looking at 2 bedroom condos that are $200,000 - $250,000. I've been playing with mortage schedules, and it looks like we'll be able to recoup closing costs and build up a significant chunk of principle even if we move in five or six years. We currently pay $1100 in rent, and will likely end up paying between $1200 and $1500 on a mortgage for a significantly larger place. It all seems much more doable than it looked at first-- we just need a few more things to fall into place. *fingers crossed*

**As always, I'm Canadian, so American mileage may vary.

[synthla]

I was wondering how everyone is qualifying for their loan. I will have a stipend of $23,000 next year. I could have used my current income to qualify if I were going to school in the same city, but because I'm moving from Boston to Chicago, I have to use my future income. Unfortunately, because I don't get a W-2 form for my stipend, the bank said I am considered "self-employed," even though my stipend is guaranteed all 5 years. The loan officer informed me that people who are self-employed have to be self-employed for 2 years before they will qualify for a new home loan. For those of you considering buying a house or who have bought a house while in graduate school, how did you get around this?

I don't know what kind of downpayment you have, but putting 20-30% down will make the lender underwriting much less onerous, because they're more comfortable - thinking you wouldn't put so much of your own money up if you couldn't make it work. And don't just go to one bank, use a mortgage broker who can interface with a number of lenders to find one who will work with your situation.

[rising_star]

I was wondering how everyone is qualifying for their loan. I will have a stipend of $23,000 next year. I could have used my current income to qualify if I were going to school in the same city, but because I'm moving from Boston to Chicago, I have to use my future income. Unfortunately, because I don't get a W-2 form for my stipend, the bank said I am considered "self-employed," even though my stipend is guaranteed all 5 years. The loan officer informed me that people who are self-employed have to be self-employed for 2 years before they will qualify for a new home loan. For those of you considering buying a house or who have bought a house while in graduate school, how did you get around this?

Are you absolutely positive you won't get a W-2 for your stipend? Is it from a fellowship or an assistantship?

[Stories]

Are you absolutely positive you won't get a W-2 for your stipend? Is it from a fellowship or an assistantship?

At Yale, all PhD students are given a "fellowship" of some sort. These aren't taxed at time of fund dispersal (our stipend comes twice a month), we have to pay quarterly taxes to federal government and CT state taxes yearly on our own. W-2's are not given--we calculate our own tax liability on our own. I don't know how common this is, though.

[cath2024]

Some things to remember right now - both prices...are at or near historical lows,

This is actually not really true. In most places, home values are still quite high. Lower than last year for sure, but still high. Point being, they could still have a ways to fall, in which case buying now is not a good idea.