Trying and failing to buy a house
Why can’t grad students get a mortgage?
We did everything right. My husband and I had excellent credit, did not have debt, and we always paid off our credit cards. We had plenty of money in our savings account. We attended financial seminars and learned all the steps involved in buying a house. And yet, when we tried to buy a small, affordable condo, we faced so many hurdles with mortgage lenders that we gave up and decided to keep renting. I blame it all on grad school.
Since my husband is a graduate student on the west coast and I go to MIT, we meet up every summer for internships at Los Alamos National Lab in New Mexico. Once we finished up our coursework, we moved to New Mexico together to finish our PhD programs remotely. We thought the time might be ideal to buy a little house. How romantic and utterly naïve.
The challenges we faced were unique to graduate students. For one, I have a graduate fellowship. Although it is a prestigious award and very stable funding, it also means I don’t get a W-2. The banks had a hard time working with me because of my lack of this simple form. I even obtained a letter from my fellowship that detailed my pay, and I submitted my previous tax returns. But in the end, it was insufficient proof of income. Without proof of income, it is impossible to get a mortgage. Even though he is also a graduate student, my husband gets regular pay from his university. With his W-2, we barely scraped by the income limit to qualify for the loan we wanted.
Unfortunately, there was another hurdle. Being a graduate research assistant is not considered a long-term job. Banks that reached out to our administrators to get proof of employment were consistently told our jobs would expire within a few years due to graduation. The short-term nature of our employment was ultimately the kicker. Long-term employment stability is key to securing a mortgage. Since we couldn’t prove that we had jobs lined up after graduation, we were considered high-risk borrowers. And thus ended our pursuit of homeownership.
Even though we failed in our attempt to buy a house, I still think it is possible to buy a house in graduate school. From my experience, there are a few keys to success.
Learn the process before you dive in
The homebuying process is definitely overwhelming. I got a head start thanks to the MIT WorkLife seminar series. A lawyer who specializes in real estate contracts gave a comprehensive and interactive talk on every step of the homebuying experience: from searching listings on Zillow to estimating the closing costs. She was amazing and made me really excited to jump into the housing market!
Think outside of the box
Getting a mortgage usually involves a trip to the bank. In our story, we went to credit unions as well as larger banks. The problem was that none of these institutions secure their own mortgages. They all underwrite their mortgages to Fannie Mae, a huge company that has hard-and-fast rules for mitigating risk. The ideal situation would have been to find a small, locally owned bank that could sit down with us and understand our personal circumstances. This blog post actually explains how to get a mortgage from a small, local bank from the perspective of a Yale graduate student who successfully bought a house by working closely with a mortgage broker in person. Another option is to get a house financed to you by the seller. In this case, the seller is essentially your mortgage lender. It is like rent-to-own, but it has a few more legal implications. In this case, you’ll want to look for houses that are for sale by the owner, instead of listed by a real estate agent. (Don’t tell my husband, but I have been eyeing a few for-sale-by-owner signs in our neighborhood.)
Don’t buy above your means
Even though there are options for graduate students who want to buy a home, it’s no secret that we aren’t the wealthiest category of people out there. Be sure to evaluate what you can afford based on your income. For us, that meant looking in the $200,000-$250,000 range. We didn’t ultimately find a lender who would work with us, but the amount of the loan was never the issue, just the details of our employment. As you set your budget for a house, be sure you can qualify for the loan you want ahead of time.
We tried buying a house in New Mexico. Keep in mind that the housing market and financial landscape is going to look very different in Cambridge. Being a grad student makes it really difficult to buy a house, and while I encourage you to give it a try if you are in a stable financial situation, you may just skip the headache and wait until after graduation. If you do dive into the housing market, just be aware that banks typically will want to see a 3-year guarantee of employment. So either start early, or wait until you have a job offer in hand close to graduation. At this point, we are waiting until I graduate and know where the next career move will take us before trying to buy a house again. I think it will be a much more successful endeavor now that we’ve had a practice round!
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