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Old 02-08-2011, 08:58 PM   #1
srumapzh
 
Join Date: Jan 2011
Location: United States
Default Buying a house with a student loan

I just realized the title is very misleading. I'd like to buy the home with a mortgage, with my father as a co-signer, and then use a student loan to pay the mortgage for the 2 years it will take to finish school, then sell the home to pay off the mortgage and the student loan. Taking the hit of taxes and interest in my own pocket.

I've never heard of anyone doing this but it is a crazy idea and I can't get out of my head. But first some background on me.

I am 23 years old, I am a junior working on an international business major. I currently have a 2.5 GPA which is hopefully on the rise this semester (4 As and a C). I hold next to no assets other then my car which is probably worth 7k and is paid off. According to a recent credit report I am in collections with Verizon for the amount of $300, I wasn't aware of this and will pay it off within the week. There are no other negative items in my report, and I have 3 accounts in good standing. I have no other debt. I live with my father, rent-free. My college is completely paid for through a trust fund. I am a delivery driver at pizza hut part-time making approx. 15k a year.

Now that's out of the way. What I would like to do is take out a student loan, apply for a mortgage and get a home. Then using the student loan to pay all or a portion of the monthly mortgage. My father has excellent credit, makes a good amount of money and is willing to co-sign.

My plan is to live in the house for the two years it takes for me to finish college(while using the student loan to pay the mortgage), sell the home at the end of that period and then repay the student loan.

Housing in my town is rather cheap(I could probably get a small home in a good area for 45-50k) On the other hand rental prices are high, around $500 a month for a safe, comfortable apartment. I can no longer live with my father for personal reasons, but we are still on good terms.

I have a feeling that the taxes and interest I would spend on buying a home would be cheaper than rent.

So is this feasible? Am I being nuts? Where do I get started and what will I need to make this happen?

Sorry about the poor formatting, and thank you for any advice you can give!
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Old 02-08-2011, 08:58 PM   #2
alaticuri
 
Join Date: Jan 2011
Location: Cyprus
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The bank will ask how you plan to repay the loan making 15K a year. If the answer is "dad will help" than the bank will feel you're committing mortgage fraud if that isn't what happens. If the answer is "student loan payments" the bank won't give you the loan.

"But they're getting paid, where's the fraud?"

The bank will take the position that had they known about your plan they wouldn't have loaned the money, or at least would have charged a higher interest rate. Since they didn't get that, you took money from their pockets by a willful omission, thus the fraud. This could actually result in criminal charges. So be real careful if you decide to proceed.
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Old 02-08-2011, 08:59 PM   #3
Yoko
 
Join Date: Jan 2011
Location: USA
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I think you should seriously consider the risk your father is taking. If anything happens to you or the house, or crazy stuff happens to either of you there's a significant downside that could financially cripple you for a long time. I wouldn't want to take that risk with my Dad's neck on the line, I'd feel terrible.

Co-signing is a weird prospect. Essentially the bank says "Our entire business is built around making smart loans and we loan money out all day. In our experience you are not a smart loan for us. However if your dad think he knows better than us and is willing to take on the risk...".

You'd be much better off, saving your hard earned cash for a down payment on a modest home, and then getting a roommate to help pay your mortgage. That's the best way IMO.
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Old 02-08-2011, 08:59 PM   #4
endopiemo
 
Join Date: Jan 2011
Location: Denmark
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This idea is just absurd.

With a few quick numbers drawn out here’s how it looks.

$150k loan amount, I think this is pretty fair for a starting home.

$900/mo payments

Over two years you would pay:
$4,122 roughly on principal
$17,760 roughly on interest
$4k taxes (this is estimated at 2k per year which is probably a low ball)

Don't forget closing costs estimated around $4k

so to live in a house you own would cost you around:

$25,882
and leave you with a balance of $145,878 on your original $150,000 loan.

Not a smart move. Compared to the $12,000 you would spend renting for two years.

Even if you did find $50k house, what kind of condition is that going to be in? Can you live in it for 2 years? Even if by some crazy circumstances you did get a house, trying to sell it 2 years from now is not going to be an easy task.

Good luck.
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Old 02-08-2011, 09:00 PM   #5
owxtmxab
 
Join Date: Jan 2011
Location: USA
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Let's say he could find a poor condo for $50k, which may be possible in some cities. I have no idea where the orig. poster lives. But, lets just say he can find a $50k condo and his dad will front 20% to avoid mortgage insurance. Property taxes of $2k. I live in a nice suburb and mine are under $2k for a $200k town home, so I think this is a fair over-estimate for a $50k condo.

Maybe he gets a 7.25% loan (also a high estimate considering ARM's might be an option for him closer to 6%). Closing costs a high $3k (yes, I think $3k is high, $4k is absurd, IMO...and so is $3k, but I digress.) I'm guessing higher interest rates due to lower credit scores.

Payment would be $289.24 plus $166.66 tax, totaling $455.90 per month.

So,
Principal portion of the $289.24 is maybe $50 (again we'll estimate low). $50*24 months payments = $1200. Equity after two years at 7% appreciation would be $57245. Sell for $57,000, pay back the loan including original closing costs, totaling $53k. $4,000 equity + 1,200 from payments made = $5,200 you walk away with. Payments made = $455*24= $10,942 paid - 5200 saved = -$5,741 loss versus -$12,000 loss renting. Go ahead and subtract another $1200 if you want to say he is making interest only payments. He still comes out ahead losing about $7k versus losing $12k renting.

If you're basing your thoughts on no rise in value of the house/condo, well that's a fine prediction, but I wouldn't say it's a given fact. I think he may not average 7% each year, but I think if it is like he says "a good area" then this might work given his Pops co-signs and he can pay for rent plus utilities.

It's late, I'm tired. I may have made some math errors as I did this quickly.

edit: it's also not fair to assume he'd buy a $150k house. I think you're not giving the dude enough credit. I'm pretty sure he knows he can't afford $900/mo. mortgage payments. Maybe he can find something for $50k, if he can't I'm sure he knows he can't land a $150k house. I've also never heard someone try to argue renting is better than buying. I'm sort of lost on that. Your reasoning is based on him buying something he can't afford an the house not appreciating at all.
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Old 02-08-2011, 09:00 PM   #6
sbled6
 
Join Date: Jan 2011
Location: England
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The only way it would really work is if dude's father wanted to buy a house as an investment property anyway, and if dude were going to school longer. The ideal situation to make something like this work would be a student starting undergrad as an independent student(24 I think?) and going to grad school in the same town. You'd probably still need a paying room mate or two to really make it work. That'd be like seven years of your student loan debt getting funneled into your dad's/landlord's property.

Then it'd be workable, and a good deal for you if your dad doesn't blow it all in Vegas before he dies, but otherwise it's a push because you were going into debt anyway.

The nice lady who does the Ask/Tell thread on student loans might have some wisdom on this. She's definitely said that practically speaking, student loans get used for all sorts of stuff. She even knew somebody who used them to pay for her wedding. There's definitely nothing wrong with using the money for housing; everyone would build and sell later rather than rent if it were worth it and doable on so little money.
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