During Professional School: To Buy or Rent (Advice, Please!)

[organichemistry]

(I am actually a pre-dental student, but the financial situation is incredibly similar to m.d. students so I'm hoping to get some input from you guys).

First of all, let me say that I'm a second year undergrad so I've got some time to figure this out. Nevertheless, I figure it is important to start thinking about how I am going to live and manage my debt.

I've worked from 8th grade and all through high school saving a vast majority of the money I made for my education. I work sparingly these days, however.

In any event, I figure to complete undergraduate school with about $25,000 in the bank, post-application process.

I'm curious as to how I should use this money. I plan on attending my state school which is the University of Alabama -- which is about as cheap as they come. It amounts to something like $60,000 over 4 years. I figure with hidden costs here and there I can predict worst case of $70,000. This does not include living expenses... namely rent and food. My car situation is fine through dental school.

My question really is this: Would it be wise to buy a house right out of undergrad? Like I said, I plan on attending my state school in Birmingham (also my home town, and the place I would like to end up practicing).

I could buy a pretty new home 20-25 minutes away for something like $130,000. So I could just use my $25,000 as a down payment on the home and pay a $500-$600 monthly mortgage (if it was a 30 year). Then I would be looking at taking out loans for dental school ~$70,000 over 4 years and living expenses (food, gas, mortage payments, miscellaneous expenses) ~$50,000 over 4 years.

seems to me that $120,000 of loans isn't abnormal and this way i would be building SOME equity... rather than just paying rent, which would probably cost me almost as much as a mortgage payment.

plus, the house would probably be a 2 bedroom, 2 bathroom so i could even rent out the other "space" for ~300-400 a month to give me a little money. or if i'm married or have a serious girlfriend, it gives us both a place to live.

just wondering if anybody has any advice, stories to tell, know anyone doing this type of thing, etc...

thanks for all your help guys.

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[OldMD]

I am always a fan of buying, rather than renting, if you can do it. It's great to build up equity and have control over your property... a few things to consider:

1. You will have all the responsibility of home ownership (repairs, lawn care). As a student these aren't necessarily things you will want to be dealing with, or have the time for them...

2. It can be a real pain to sell. If you want to suddenly move to another school, or to a residency when you're done... it might take a year to get the house sold.

That being said, my husband and I own a very nice home, and I am a first year med student. We are fortunate enough to be in a good finanacial position. I say, go for it!

OldMD

 

[kenmc3]

If you are only going to own the home for 4 years (dental or md school), most of what you pay will be toward interest and not toward the principal. So really you are paying money you will never get back unless:

1) The property appreciates more than what you paid in interest
2) You paid a large down payment
3) You live in the house for more than 3-4 years

I am starting med school this year in Miami, and I considered buying a condo. Even though the Miami market is very expensive I figured there was no way for me to come out ahead. First, there are like 50 new condo buildings being constructed, so there is not much of a chance for appreciation over the next 4 years. Second, I have enough money to make a down payment, but not anything that would be worth it. Finally, I can’t guarantee that I would be going to Miami for residency, so I may only be there for 4 years. In the end I chose to rent, because owning the place for that short of time with no appreciation, my money would be going toward interest anyway and I would never see it again.

 

[MeowMix]

Congratulations for saving all that money. That alone is the wisest investment you could make.

A few things to think about, other than the excellent points already made:
- there are a lot of interesting places outside Birmingham and Alabama. As you get older, you may find that you want to see some of them. Your plans may change in the next few years.
- the place that is so great for an undergrad male is rarely great for a serious girlfriend or wife. Most couples I know prefer to have a new place that's theirs, not a place with his or her stamp on it.
- your budget relies on nothing going wrong. Termites, car accidents (getting rear-ended), sewer backups, and other things can put you in the hole really quickly. Be sure that if you buy, you have a reserve fund.
- do you enjoy fixing things, and are you good at it? or are you optimistically hoping that you will enjoy and be good at it? or are you planning to hire someone to do repairs? even new houses require an amazing amount of minor repairs.
- if you live 20-25 minutes away, how easy will it be to find a roommate?
- by the time you buy a place, interest rates might not be quite as good as they are right now.
It is too early for you to make a decision about buying a place, but certainly keep thinking about all the different factors involved, and do the calculation for how much the house would have to appreciate in order for you to break even. Do not forget to factor in the realtor's 6% commission when you sell, closing costs, etc.

 

[OldMD]

If you are able to, make a large down payment (at least 20%). As KenMC just mentioned, you end up paying lots of interest unless you make a substantial down payment. And if you put down 20%, you avoid PMI (private mortgage insurance).

I love the real estate business, if I wasn't in med school I would be a real estate agent.

OldMD

 

[cosmo]

If you are only going to own the home for 4 years (dental or md school), most of what you pay will be toward interest and not toward the principal. So really you are paying money you will never get back unless:

1) The property appreciates more than what you paid in interest
2) You paid a large down payment
3) You live in the house for more than 3-4 years

I am starting med school this year in Miami, and I considered buying a condo. Even though the Miami market is very expensive I figured there was no way for me to come out ahead. First, there are like 50 new condo buildings being constructed, so there is not much of a chance for appreciation over the next 4 years. Second, I have enough money to make a down payment, but not anything that would be worth it. Finally, I can’t guarantee that I would be going to Miami for residency, so I may only be there for 4 years. In the end I chose to rent, because owning the place for that short of time with no appreciation, my money would be going toward interest anyway and I would never see it again.

This is slightly inaccurate. While it is true that the grand majority of your payment will be going to interest, you get a huge tax deduction at the end of the year if you itemize. And when I say huge, I mean my husband and I went from PAYING money at the end of the year to get getting 4 grand back when we bought our house, with very few other changes to our tax file. So you still may be paying only interest on your loan, but the tax advantage could be well worth it, since you don't get that by renting.

Good luck, and congrats on having the wisdom to save all that money. You could probably start a seminar and teach many people older than you your methods.

 

[MeowMix]

This is slightly inaccurate. While it is true that the grand majority of your payment will be going to interest, you get a huge tax deduction at the end of the year if you itemize. And when I say huge, I mean my husband and I went from PAYING money at the end of the year to get getting 4 grand back when we bought our house, with very few other changes to our tax file. So you still may be paying only interest on your loan, but the tax advantage could be well worth it, since you don't get that by renting.

You only get a tax advantage if you have income against which to deduct the mortgage interest. When you are paying $15,000 plus in tuition and fees, it is very unlikely that you will have enough income that you will need the additional deduction of mortgage interest. If you have a wage-earning spouse, of course, the whole picture changes.

 

[skypilot]

Put the money in the bank and focus on your studies. There will still be affordable houses for doctors in Alabama when you graduate. If you want to make a few bucks buy a 5 year CD with the $25k.

 

[Geronimo]

We bought last month. I had an awesome Mortgage guy who worked out a cool deal for me. We did the 80/20 loan (piggy back) so I didn't have to pay PMI. We set up a traditional fixed rate - interest only loan for the 80% which came to about $420 a month. Add in homeowner's insurance and taxes, it was $504 a month. The 20% loan was a Line Of Credit, meaning it works like a credit card. You can put money in and take money out as you need it. You pay interest only as well. If maxed out, my payment on it would be about $120. This is on a $112,000 home. I took the proceeds from my last house, my savings, and a "zero interest" balance transfer from one of my credit cards and shut down that Line of Credit. So my house payment for my first year is $504. Then I have to pay off that zero interest balance transer from my credit card so as to not accrue any interest on it, and that will bump it back up a little. This setup gives some awesome flexibility and also allows me to own a home building equity as the home appreciates and as I pay it down some. It was a real blessing for us!

 

[OldMD]

We bought last month. I had an awesome Mortgage guy who worked out a cool deal for me. We did the 80/20 loan (piggy back) so I didn't have to pay PMI. We set up a traditional fixed rate - interest only loan for the 80% which came to about $420 a month. Add in homeowner's insurance and taxes, it was $504 a month. The 20% loan was a Line Of Credit, meaning it works like a credit card. You can put money in and take money out as you need it. You pay interest only as well. If maxed out, my payment on it would be about $120. This is on a $112,000 home. I took the proceeds from my last house, my savings, and a "zero interest" balance transfer from one of my credit cards and shut down that Line of Credit. So my house payment for my first year is $504. Then I have to pay off that zero interest balance transer from my credit card so as to not accrue any interest on it, and that will bump it back up a little. This setup gives some awesome flexibility and also allows me to own a home building equity as the home appreciates and as I pay it down some. It was a real blessing for us!

That's a great deal, you are fortunate!

 

[i61164]

(I am actually a pre-dental student, but the financial situation is incredibly similar to m.d. students so I'm hoping to get some input from you guys).

First of all, let me say that I'm a second year undergrad so I've got some time to figure this out. Nevertheless, I figure it is important to start thinking about how I am going to live and manage my debt.

I've worked from 8th grade and all through high school saving a vast majority of the money I made for my education. I work sparingly these days, however.

In any event, I figure to complete undergraduate school with about $25,000 in the bank, post-application process.

I'm curious as to how I should use this money. I plan on attending my state school which is the University of Alabama -- which is about as cheap as they come. It amounts to something like $60,000 over 4 years. I figure with hidden costs here and there I can predict worst case of $70,000. This does not include living expenses... namely rent and food. My car situation is fine through dental school.

My question really is this: Would it be wise to buy a house right out of undergrad? Like I said, I plan on attending my state school in Birmingham (also my home town, and the place I would like to end up practicing).

I could buy a pretty new home 20-25 minutes away for something like $130,000. So I could just use my $25,000 as a down payment on the home and pay a $500-$600 monthly mortgage (if it was a 30 year). Then I would be looking at taking out loans for dental school ~$70,000 over 4 years and living expenses (food, gas, mortage payments, miscellaneous expenses) ~$50,000 over 4 years.

seems to me that $120,000 of loans isn't abnormal and this way i would be building SOME equity... rather than just paying rent, which would probably cost me almost as much as a mortgage payment.

plus, the house would probably be a 2 bedroom, 2 bathroom so i could even rent out the other "space" for ~300-400 a month to give me a little money. or if i'm married or have a serious girlfriend, it gives us both a place to live.

just wondering if anybody has any advice, stories to tell, know anyone doing this type of thing, etc...

thanks for all your help guys.

I think that buying can be a good idea because if your house appreciates you will make a profit, but how are you going to qualify for a mortgage? Do you know what your credit score is? Even if you have had a credit card and paid your bills on time, you probably don't have a very long credit history. Even if your credit score is pretty good, the bank is going to want to see some proof of income. I am buying a house right now and starting school in July. My mortgage pre-approval letter says that the loan is contingent upon me being able to prove that I have a certain income (they want to see pay stubs). Maybe you can get a cosigner to help you meet the income requirements. Just giving you a heads up that you may need to involve Mom and Dad in this process.

 

[shawred]

You don't have to prove income if your credit is good enough. As long as your credit is above a 650 or so, a bank will loan you the money. It is called "stated income". I am in the process right now and it is actually fairly simple.

 

[i61164]

You don't have to prove income if your credit is good enough. As long as your credit is above a 650 or so, a bank will loan you the money. It is called "stated income". I am in the process right now and it is actually fairly simple.

My credit score was 718 and the bank wants to see pay stubs and proof of my checking account balance. I'm not really an expert, but I assumed that this was pretty standard. I just talked to my neighbor and he said it depends on how much you put down. He put down 20% and they didn't ask him for any paystubs. I plan to put 0% down.

 

[Kateroni18]

I'm going through the process right now. I have a credit score of 770, but I still had to have some proof of income or savings and have at least 25% down. My dad gave me the down payment and I had to give the mortgage folks proof that the money's in my account and a "gift letter" saying the money was a gift.

The point is I think it's very difficult to get approved for a mortgage without a full-time income unless you can make a significant down payment, regardless of your credit history. But, this also depends on how big of a mortgage your taking out.

 

[putzeled]

I'm going through the process right now. I have a credit score of 770, but I still had to have some proof of income or savings and have at least 25% down. My dad gave me the down payment and I had to give the mortgage folks proof that the money's in my account and a "gift letter" saying the money was a gift.

The point is I think it's very difficult to get approved for a mortgage without a full-time income unless you can make a significant down payment, regardless of your credit history. But, this also depends on how big of a mortgage your taking out.

I was a mortgage broker before making the change to medicine. With excellent credit, roughly 670 and up, you can do a "stated income" loan up to 100% of the purchase price of the home. Meaning you only need to state your income on the application. It's not verified by the lender. Most (but not all) lenders will only do stated income for self employed individuals though. There are even "no-doc" loans that don't require any information about your employment, income, savings, etc. If you have great credit you can get into a home without verifying income or putting any money down. You just need to find a good mortgage broker who knows what they are doing and is willing to work to find you the right lender. Don't just settle for what your local bank offers.

 

[drguy22]

Put the money in the bank and focus on your studies. There will still be affordable houses for doctors in Alabama when you graduate. If you want to make a few bucks buy a 5 year CD with the $25k.

agreed...put it in a INGdirect savings account...3.00% interest rate...if ya want ill refer u...that way u can make $25 just for signing up and ill make $10

youll get about $750/year in interest.

 

[Mike59]

It's a no brainer- ALWAYS buy if you have the choice and ability to do so.

People have been hung about the "only making payments toward interest" and this is partly true. The flip side is that by owning property, you are along for the ride as your house APPRECIATES, and nearly all homes/condos/townhouses will, especially if you are buying new. Even if your house goes up 15% in value (which is a low estimate) in the next four years, you will reap the rewards when it's time to sell, and 15% over four years is much safer in real estate than it would be in say stocks.

The only tricky part would be securing both a mortgage and a student loan simultaneously, especially if you won't have an income in professional school (even with a sky high FICO score, I don't see how this is possible). It would be best if you have a trustworthy family member to take on the mortgage in their name and you can always make arrangements after graduation to transfer back from them.

Good luck!

 

[Law2Doc]

It's a no brainer- ALWAYS buy if you have the choice and ability to do so.

People have been hung about the "only making payments toward interest" and this is partly true. The flip side is that by owning property, you are along for the ride as your house APPRECIATES, and nearly all homes/condos/townhouses will, especially if you are buying new. Even if your house goes up 15% in value (which is a low estimate) in the next four years, you will reap the rewards when it's time to sell, and 15% over four years is much safer in real estate than it would be in say stocks.

The only tricky part would be securing both a mortgage and a student loan simultaneously, especially if you won't have an income in professional school (even with a sky high FICO score, I don't see how this is possible). It would be best if you have a trustworthy family member to take on the mortgage in their name and you can always make arrangements after graduation to transfer back from them.

Good luck!

Well, I'm a big proponent of buying, but I disagree with this post. Whether it makes sense to buy or rent totally depends on an individual's circumstances, especially one's income, one's likelihood of staying put in the same place for a number of years, and most importantly - location, location, location. If you have income, buying usually makes sense as you can take advantage of mortgage interest deductions, which are very nice tax breaks. Tax breaks plus a chance of appreciation make it a better deal to buy over rent for many, when you run the numbers. But most students don't earn any substantial income so this limits some of the benefit the average american gets from buying. There are parts of the country where things are rapidly appreciating and the 15% is conservative, but really not so everywhere. But appreciation is really only one of two possible directions it could go . Also there are lots of costs and headaches incident to home ownership, and so one bad instance of flooding or broken pipes or a leaky roof can easilly make it financially more sound to have rented. And since you mentioned "condos", it should be noted that these often make a lot less financial sense to own as a student, as condo fees alone can sometimes make it more financially feasible to rent unless you ultimately have substantial appreciation. So the truth is, whether it makes sense to buy or rent really depends on individual's circumstances and the market in which he/she is contemplating residency. I would think there simply isn't going to be a consensus or blanket rule - everyone can be right/wrong depending on their situation.

 

[mshheaddoc]

Have any of you bought a house during school with your income stated as a student? I have heard of a few that have done that.

but do lenders let you qualify on student loans? Most require jobs. That is what I'm trying to find. I herad some lenders will accept guaranteed student loans as income and I'm trying to find out who they are.

 

[Biodude]

Wow, I thought I was the only one thinking of buying once I ended up in professional school!

My mom wants to sell her house (we live in Southern CA, and house prices are insane down here - we'd probably end up with around 450k easily before paying off the loans) and use the money left over to buy two houses, one near my aunts and uncles, and the other in a city that I would end up going to medical school or establishing my practice at.

Everything's been informative thus far.

 

[virilep]

I don't know if this will be helpful for you all. but here is a cool website.

http://houseandhome.msn.com/calculators/rentorbuy0.aspx

it basically tells u which one is cheaper to do for you. buy or rent?