We asked our friend Russell Smith, a branch manager and loan officer with Alcova mortgage, to share his thoughts about buying homes for college students:
Buying a home for a college student
A strategy for some families involves parents buying a home for a child to attend college. Why not own a home rather than rent and potentially bring in enough rental income from roommates to cover the mortgage! One way to finance a home for an adult college student to live in is using an investment property loan. These require a larger down payment and higher interest rates. But another option with a lower down payment requirement and typically better mortgage rate is for the parents to cosign. Foremost, the student must have a good credit score. Though this may be tough for an 18-year-old to have, it doesn’t need to be extensive credit for the primary borrower. In a cosigner scenario like this, the occupying student does not even need to have income if the parents have sufficient income to qualify with all borrower’s debts plus the new house payment. So, this is perfect for undergraduate or graduate students. Therefore, instead of paying high rent on college campuses, consider cosigning for son or daughter with the favorable terms of a primary residence loan!
- Invest in real estate rather than pay high rent
- Include roommates to help cover mortgage payment
- Cannot use rental income to qualify as primary residence
- Parents do not have to live in the property
- Once student graduates, could keep it for further investment, sell it, or student continues to live there
Does this sound like a good strategy for you? Let’s talk!
Credit tips: Below is an email template we send to clients as a follow-up to our conversation about improving their credit. You can pull a lot of good information from it
Remember to consider sharing the upcoming medical collection changes too
First of all, thank you so much for trusting our team to help you achieve your dream of home ownership. We are committed to providing you with the best advice for putting you in the position to meet your goals. So, today we commit to starting a relationship with you in this journey. It starts with tips from your credit experts.
As discussed, currently your credit scores and overall make-up are not eligible for any of our home buying products, so we are providing you with suggestions to improve your credit as well as improve your chances of home loan approval.
Understanding mortgage credit scores: Most common credit question: “Why are my mortgage credit scores different than what I pulled myself?” Here is an article we wrote which explains mortgage credit scoring
How Your Credit Scores are Determined:
35% of your credit scores are based on payment history which includes items like:
- Late payments – If any late payments are in error, reach out to the creditor or credit bureaus for removal. It doesn’t hurt to ask!
- Collections – If any collections are in error, reach out to the creditor or credit bureaus for removal. See additional notes below
- Best option: see if the collection can be completely removed from the bureaus. Then it is like it never existed. Not all creditors have to do this, but they may
- Medical collections seem to be the easiest to have removed once you pay them off
- If an older collection is updated to show it is paid off now (not removed), then for the short term it will not help your scores as it is treated like the collection activity just happened
- Judgments – These can not only hurt your credit but also potentially attach to assets such as a home. It is important to clear these up and if it can be removed from credit, that is best
- Pull your credit for free (without credit scores) at www.annualcreditreport.com. You can review for accuracy, dispute erroneous items, and keep up with your credit improvement
30% of your credit scores are based on balance compared to credit limits as a percentage:
- If you do not have any credit cards or lines of credit, you are missing out on almost of third of your credit scores! Typically having 2 credit cards used correctly is optimal
- If your credit scores are too low for a traditional credit card, a secured credit card could be your solution. They have higher rates and fees, but if used as shown below without carrying balances, the cost is minimal and you then have established credit line history to improve scores
- Keep your balances at a very low percentage of your credit limits. Here are examples of what we mean…
- If your credit limit is $500, it is best to keep your balances under 10% of the credit limit which would be $50 in this example
- If you owe $450, this is not a large balance, but it is 90% of the credit limit. This would hurt your scores a lot!
- If you owe under $50 each month in this example, you would receive the most points possible for this portion of your scores
- Tip: Pay off any card balances if possible, then charge $20 or so each month, pay the bill off in full and on-time once received, and repeat every month. You will keep a very low balance to maximize scores
15% of your credit scores are based on length / age of credit history:
- The longer you have established credit, the better the scores
- Keep credit cards open a very long time! Keeping cards open and active (using the tips above) will help your scores
- By closing cards open for a long time, it will reduce the current average age of your credit history which could lower your scores
10% of your credit scores are based on credit mix:
- It is best to have a good mix of credit. For instance, only installment loans mean you are missing out on 30% of your credit score (see above!)
- A good mix could include 2 credit cards (used correctly), an installment loan or two, and a mortgage
- Excessive finance company loans are considered a negative
10% of your credit scores are based on new credit:
- The credit bureaus consider opening several accounts recently is considered risky
- Although if you need to establish credit such as credit cards, that is usually more important and the inquiries probably make sense because you are improving 30% of your score and having some potential negative impact on this less impactful part
- Opening a new car loan before applying for a home loan can not only affect your credit score, but it could provide a higher loan payment which may make it more difficult for home loan approval
Paying rent: Although rent may not always report on your credit report, it is important to pay it on-time and be able to document the pay history
- This is especially important if your credit scores are borderline compared to home loan guidelines
- Paying by check or online service usually work best so you can document no 30 day late payments
- Do not pay by cash because it is very difficult to prove you actually paid the rent from your account
Student loans in collection: Federal student loans offer the ability to set up a payment plan so that once enough on-time re-established history is in place, they can start reporting as on-time going forward. Having federal student loan collections disqualifies buyers from federal home loan programs such as VA, FHA, and USDA
Credit inquiries: Be mindful of who and how often your credit is pulled. If you need to establish credit, then it is necessary to have inquiries. But keep them to a minimum as it does impact scores
Build your savings: Assets are a great compensating factor! So save as much as you can including accounts like checking, savings, investments, and retirement accounts
Keep in mind, these are tips and areas we have seen that can improve credit scores but are not a guarantee.