Can I buy a house using a student loan?
September 17, 2007 8:50 PM   Subscribe

Can I buy a house using a student loan? Would this even be a good idea?

I'm going to be in grad school for a quite a while, and I wanted to buy a house using a generous cash loan from family as a down payment, and student loans + renting the rooms to cover the mortgage payments. Grad school is paid for by TA'ing and eventually by a GSR position, which means the entirety of the loan would go towards the house.

I would buy the house once the market really flops over, and I can get a good price. I'm also fairly confident that the property will increase in value, as it would be near a university by the beach in California.

Questions: (1) Is this possible? (i.e. are there any specific restrictions against doing something like this) (2) Is this a good idea? (3) If I go through with this, what sorts of pitfalls and potential issues should I look out for?

posted by spiderskull to Work & Money (13 answers total)
I know that someone that essentially did this, but are you certain you'll get student loans if your school expenses are paid for?

In terms of possible issues, don't forget that you'll be paying for more than just a mortgage. My friend had to lay out a fair amount of capital over the years for upgrades/repairs/insurance even with a steady rental income. Also, it was very difficult for him to be the "landlord" while living there. He had a certain level of respect for his house, but as renters, his roommates didn't and it was hard to reconcile that. When he put the house up for sale, he had to go through a lot of extra steps and fixes (read: costs) to cover their (and his) negligence. YMMV of course.

He made a profit when he sold, but only because he bought early in a bad neighborhood that is experiencing a transformation. All of his neighbors that bought a year or two after him that were "fairly confident the property would increase in value" are still stuck with their properties after 6+ months on the market.

Do you have to pay back the cash loan from your family? If you have to pay back that loan, plus the mortgage, I wouldn't do it. I could go into all the math, but unless you get some really great returns, I just don't see how you'd come out all that much ahead, particularly after the costs associated with home ownership and buying/selling. Plus, that basically makes it a zero-down mortgage, just without the bank's involvement/mortgage insurance, and isn't that sort of thing how we got into this whole mortgage meltdown in the first place?
posted by ml98tu at 9:15 PM on September 17, 2007

I would buy the house once the market really flops over, and I can get a good price. I'm also fairly confident that the property will increase in value, as it would be near a university by the beach in California.

California is certainly in for a housing decline, but I think you're optimistically oversimplifying what is likely to be a much more complicated, rocky ride (just take a look at the history of past housing declines in CA). First off, how do you know when prices hit bottom? I've read predictions that range from the next six months to the next five years -- I think it's just impossible to say at this point. And how do you know prices will have increased to a level you're comfortable with when you need to sell? Again, there are way too many X factors involved right now to do anything but hazard wild gueses.

First, the big price declines are likely to affect some areas far more than others -- and roomy, well-maintained houses in attractive university areas near beaches are likely to decline quite a bit less than, say, 750 sq. foot stucco boxes in the middle of the Inland Empire or the Central Valley.

Also, keep in mind that a "good price" in CA is relative to the insane prices we have now -- even if prices eventually drop 50% in L.A., for example, that still means that today's million-dollar 3-br houses near the beach are going to be 500k -- which, using one of the classic models of affordable home buying (20% down payment and a mortgage that doesn't exceed more than 3 times your annual income), means you'd have to put $100,000 down and make more than $130,000 annually in order to comfortably make your monthly mortgage payment, insurance, etc. And I don't know where you're going to grad school or how much you plan to rent rooms for, but I can't imagine between your loans, TA income, and a few roommates you'd be clearing anything approaching a fraction of that.

And even say you do come across something awesome for cheap, with all the decline in value that the owner may have absorbed, it's possible they won't have done regular maintenance. So where are you going to get the cash for the new roof or to replace the plumbing or paint the place or put in new floors before your renters even move in? Another loan?

All that aside, you're still basically using loans from two sources (parents and school) that you'll eventually have to repay in order to secure and then pay a third massive loan. I would see that as an very risky situation to be in, especially given that (again) there's just no way of knowing how far the market will fall, and how long after that it will take to recover. And even when it does eventually recover, it's not like you're going to be able to turn the house around a few years after you buy it and double your investment, the way it happened here for a couple of brief, insane, wildly damaging years. Those days are over for the foreseeable future.

Needless to say, I wouldn't do it; I'd rent and invest in an index fund on the side.
posted by scody at 9:59 PM on September 17, 2007

If I recall correctly, when my wife and I bought our first house we had to prove that our down payment was something we had saved, and that it was not provided by any other source (like parental gift, etc.). This was established by showing our bank statement, pay stubs, etc. We got an FHA mortgage loan; maybe other loans don't have this restriction.

Is yours going to be an FHA loan? If so, aside from whether it makes financial sense to do what you are contemplating, I didn't think a down payment was supposed to be a loan from anyone.
posted by jayder at 10:03 PM on September 17, 2007

(1) If you're talking about federal student aid, then YES there are specific restrictions. It's right on the promissory note. "You must certify that you will use federal student aid
only for educational purposes."
People ignore this all the time, but most people aren't spending it in places where they've got to account for its origins to other federal agencies. Whereas you will. The bank, and FHA, will expect you to show where all down payment funds came from. That it's a loan, period, is not good. That it's a federal student loan used for purposes that the loan doesn't not allow (which from the mortgager's perspective means a risk of that loan being called early, jeopardizing their investment in you), is just going to make you a worse bet.

(2) Right now even people with great incomes, 20% downpayments, and high 700s FICOs are seeing mortgages applications rejected for no good reason. Anyone who can qualify for need-based federal student aid is not someone with remotely enough income or assets to hold down a coastal California mortgage. There's almost no chance you'll find a lender willing to write this loan. If you did, well any loan over $417k is pretty much gone for the moment anyway, or exorbitantly priced; and you can't even buy a shithole fixerupper for less than that in any coastal CA university town except possibly Eureka). There's even less chance that you'll come out ahead (and at least 50/50 odds of winding up with foreclosure and/or bankruptcy on your record) if you somehow manage to get a mortgage for it. Within 1-2 years, the bank is going to own it. Writing mortgages to people who couldn't afford them is how this mess started.

On a personal note: it's hard enough to get financial aid for those who have serious need, and do plan to put everypenny of it into tuition. Please don't take money out of that pool if you don't need it for school expenses. Go graduate debt-free, and enjoy the freedom it gives you to build savings early (when the power of compounding interest matters most) while the rest of us are held back by student loans. You'll be able to buy a house easily 10 years ahead of your peers. Really. //voice of embittered experience

(3) Homeownership in general, and landlording in particular, has too many issues/pitfalls to address here. This is an excellent time in your life to read up on landlording, take some adult ed classes on real estate investing, maybe even arrange a P/T job in a real estate management office so you can make the rookie mistakes on someone else's dime. Then when you've got a (real) downpayment and enough income to cover the mortgage, you'll be well positioned to do so profitably.
posted by nakedcodemonkey at 11:10 PM on September 17, 2007

Can I buy a house using a student loan?

The short answer is "absolutely not". First of all, when you get the loan, you sign a promissory note that says in part that the money will only go for school related expenses (which on most loans you have to approximate those up front). Once you get the loan check, of course you can take a chance and take a ski vacation with it, buy a car, or buy a house. Of course if the school or the bank or the feds suspect anything, I'm quite certain you will pay for it in this life (and the next).
In other words, dont have any illusions: it would be completely illegal and there would be consequences if you are found out.
posted by jak68 at 11:36 PM on September 17, 2007

this also depends on your credit rating, and the lender you choose. i happen to have really good credit (as does the bf unit). we applied to countrywide. because of our credit score, we didn't have to show them a thing about where any of our funding came from. all we did was sign the papers, and hand a certified check over for the down payment, and another at closing.

now i'm not advocating using your student loan to buy a house, but there's one option to try out if you intend to go through with it. though you might not qualify for the "fast and easy" loan like we did.

on another note, i paid my rent with my student loan....granted it was where i lived while i was in school...but i don't see the huge difference between paying your mortgage with the same money.
posted by picture_yellow at 11:48 PM on September 17, 2007

picture_yellow, you didn't get that mortgage in the last month. "No doc" loans are at thing of the past. They don't exist anymore, are very unlikely to return, and Countrywide is in serious trouble because they wrote so many loans like that. Also, "educational expenses" is defined to include modest living expenses during the school year; it's part of the cost schedule -- along with food, transport, books, etc. -- that the school calculates as a basic for determining financial aid need. Using student loans as downpayment on real estate is patently different from using it to pay 10 months on a studio or dorm room. The lender, and Dept of Ed, aren't going to view these as interchageable.

spiderskull, one more wrinkle: student loans, even private ones, are extremely hard to discharge in bankruptcy. (There's a financial hardship exception, but don't count on being able to exercise it if you've got federal loans -- they're always willing to setup terms the payer can live with, so good luck convincing a court that they're making it impossible to live. So iif (when) you do get in too deep on the mortgage, you'll lose the place, gain a stain on your credit, YET retain a significant debt. Yuck.
posted by nakedcodemonkey at 12:23 AM on September 18, 2007

I bought a house in March. (Not in CA, though.) Echoing what jaydar said, though we don't have an FHA loan, it was not permitted to use a loan for a down payment. We had to provide a paper trail for all monies being used to finance the house: paychecks, cashing out an investment, etc.
posted by desuetude at 6:29 AM on September 18, 2007

I knew a bunch of people in grad school who did this. But this was in an area with a depressed economy and very cheap houses available -- most of the people I knew paid between $60,000 and $80,000 to buy a modest "needs cosmetic work" house in an ok but not super neighborhood. At those kinds of prices, your TA salary plus your savings (or a "gift" from your family) plus renting out a room or two is plenty; no need for student loans. Once you add another zero onto those prices, though, as you probably would in coastal CA, I don't see how you can make the money work. A cheap house, even if it doesn't appreciate very much, will likely save you money from rent over the 5 or so years of a doctoral program, and if you are continuously renting rooms you may well turn a nice profit. Buying a house that is in the half-million range, and leveraging it through at least four loans, exposes you to way more financial risk than I personally would be willing to take on in grad school.

Have you considered some other slightly outside-the-box ideas, like using that money to buy a used RV and living in a university parking lot or a friend's driveway?
posted by Forktine at 6:47 AM on September 18, 2007

I would buy the house once the market really flops over, and I can get a good price. I'm also fairly confident that the property will increase in value, as it would be near a university by the beach in California.

OP, this is a terrible plan. You are assuming that you will perfectly time the market, which is impossible even with perfect information. You're planning to pay the mortgage with shorter-term debt at a higher interest rate. (Unless you can only qualify for mortgage with a higher rate than an unsecured student loan, in which case, well, that's not good, either.) With your low TA income, you're unlikely to get any tax benefit while you own the house. Even if you do make a gain on the house, you're going to owe capital-gains taxes on that gain because of your rental business.
posted by backupjesus at 7:43 AM on September 18, 2007

You mention renting to cover the mortgage payments. Is this house zoned for rental? Are you planning to declare your rental income on your tax return and pay taxes - state and Federal - on it, or do you prefer to commit felony tax evasion?

And how about when your stoner roommates say, "Hey, dude, can't make rent this month. It's cool, I'll bail." Your final is in one week, you're going to miss this month's rent, and you need to rent the place for next month or you're going to miss a mortgage payment. Worse, what if your stoner roommate doesn't pay and doesn't move out? You can't just throw him out - he has legal protections, he can probably stay there rent free for six months and you have to eat the cost. In general when you calculate how much rental income you could theoretically generate, you have to allow 35% for vacancy and another 25-35% for income taxes.

Now, what about fire insurance, flood insurance, gardening/landscaping, water and power (used by roommates but presumably not paid for by them), plumbing/electrical work, roof leaks, maybe a new roof when it starts leaking - salt air is very rough on houses - property taxes (2% of the appraised value of the property per year - that's $12,000 a year on a $600,000 property!) You might be able to skip some of this if you are living in the house alone, but your tenants are going to demand them - no one wants to live in a flophouse.

You sure your cash flow as a college student is going to cover these expenses? I'm not.

Planning to allow collegiate parties in this house? Better get some liability insurance, or one day some kid will alcohol-poison themselves on your premises and a week later that kid's parents will lawyer up and take your house away from you.

What about when you decide you don't like your grad program and want to transfer elsewhere or take a year's break. No student loans that year - you'll be foreclosed on, or have to sell quick (maybe below market price) unless you stay in school. You really want to lose those life options?

I'm not actually saying it's a bad idea, just that there's a lot to think about. And to be quite frank I doubt you've looked at the prices of houses near the beach in California recently, or else you haven't done the math right, because I see *no way* that you could make the numbers work even if you get earnings and loans of combined $100K / year.
posted by ikkyu2 at 11:27 AM on September 18, 2007

This is all great advice, thanks. It's an admittedly questionable plan to begin with, considering how expensive houses on the market are.

I considered doing this because the total amount of money I'll be putting into rent is at least $50K throughout grad school; I now see that this is nothing compared to the overhead costs and risks involved.
posted by spiderskull at 3:14 PM on September 18, 2007

we applied to countrywide. because of our credit score, we didn't have to show them a thing about where any of our funding came from. all we did was sign the papers, and hand a certified check over for the down payment, and another at closing.

I know a guy who works at Countrywide, and Countrywide is a very shady outfit, masters at shoehorning anyone into a mortgage whether or not they can afford it.
posted by jayder at 4:01 PM on September 18, 2007

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