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home ownership

Why and How These Grad Students Purchased Homes

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In this episode, Emily presents first-person stories from grad students who bought homes during grad school. The volunteers were simply asked to share their stories of home ownership, whatever they may be. You’ll hear from three volunteers throughout this episode, both on how they purchased their homes but also what’s happened since then, the benefits and the challenges. Perhaps you’ll be inspired to pursue home ownership yourself sooner rather than later. The final person included in this episode is a mortgage originator specializing in early-career PhDs, who summarizes why graduate students and anyone paid by fellowship have a difficult time securing a mortgage and his system for framing them as qualified borrowers.

Links mentioned in the Episode

grad student home ownership

Teaser

00:00 Courtney B: Owning a house is all about the long game. We hope to see large returns on the remodeling and roofing work once we sell, but for now we have to be willing to put a decent amount of cash down for deductibles, emergencies and our new monthly loan payment.

Introduction

00:18 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others.

00:47 Emily: This is Season 15, Episode 2, and today we’re featuring first-person stories from grad students who bought homes during grad school. I simply asked the volunteers to share their stories of home ownership, whatever they may be. You’ll hear from three volunteers throughout this episode, both on how they purchased their homes but also what’s happened since then, the benefits and the challenges. Perhaps you’ll be inspired to pursue home ownership yourself sooner rather than later. The final person included in this episode is a mortgage originator specializing in early-career PhDs, who summarizes why graduate students and anyone paid by fellowship often have a difficult time securing a mortgage and his system for framing them as qualified borrowers.

01:32 Emily: By the way, there is still time to volunteer for one of the compilation episodes coming up later in the summer, specifically the episode on unions and unionization movements. If you have a story to share on that topic from the last few years, please email me at [email protected].

01:52 Emily: This next announcement is specifically for those of you who are applying to PhD programs in the US in the upcoming academic year. If you’re not in that group, please share this information with someone who is! On Friday, July 14, 2023 at 10:00 AM Pacific Time, I’m delivering a free webinar titled “Don’t Accept Admission to a PhD Program without a Sufficient Stipend.” Yes, this is something you need to understand and commit to even before you start applying to PhD programs! The three phases of this webinar are to go over why you need to be sufficiently financially supported in your PhD program and what that means to you; how you can ensure that you will be; and what actions you need to take in the fall during application season, in the spring during admissions season, and in the summer before you matriculate to make this come about. This webinar includes what I wish I had known as a prospective graduate student and the hidden financial curriculum of academia that it’s taken me over a decade to uncover. It’s so vitally important for prospective graduate students to have this information early, which is why I’m giving it away for free! Please help me spread the word! Anyone interested can register for the webinar at PFforPhDs.com/sufficientstipend/.

03:20 Emily: You can find the show notes for this episode at PFforPhDs.com/s15e2/. Without further ado, here’s our compilation episode on home ownership.

Hannah Stroud, PhD Student: College Station, TX

03:37 Hannah S: Hi, my name is Hannah Stroud. I am a final year PhD student at Texas a and m University, uh, which is located in College Station, Texas. College Station, Texas is a city with a extremely low cost of living compared to other areas of this country, uh, which is pretty much the only reason that I am here sharing my home ownership story with you today. , I guess I started my PhD in 2020 and purchased my house in March of 2021, and I had been a grad student before that and had been living in college station since 2014, so I’ve been here a while. Uh, and the low cost of living in this area in general allowed me to save a pretty substantial amount of my stipend just comparatively. So in my master’s, I think I was paying like six 50 in rent, uh, per month, uh, which meant that a decent portion of my stipend could go to fun activities or savings in general.

04:37 Hannah S: Um, how I grew my savings was through a robo-advisor managed, uh, money market account and also ETF investments. Um, and that was really helpful in kind of just turning what I had saved into enough to be able to afford a down payment. Uh, and so when I started the kind of mortgage lending process, um, in the first month of my PhD, so I am a fellowship student, which means my income is not w2 and I’m a NSF GFP fellow, which means that my intimate income is guaranteed for three years. So when I started my mortgage process, uh, that was important to my lender. What I didn’t realize is that when my mortgage rates were locked in, uh, they wanted my three years of employment to be verified from the time of closing. So when I closed six months later, I actually ran into some issues, uh, where my lender wanted some way to guarantee that I would be employed at the same salary that I’m currently making, uh, for three full years, not the two and a half that I could promise based on the time that had elapsed.

05: 43 Hannah S: Um, so I ended up needing to increase my down payment to the full 20% so that I didn’t have to qualify for private mortgage insurance anymore. But ultimately, the main aspect of my home ownership story is truly luck. Uh, I’m very fortunate to live in a very low cost of living city, and the timing of the pandemic honestly played a lot into the house prices being very low and mortgage rates being what they were. So given the current environment, I don’t know that a lot of this advice is incredibly applicable, uh, but advice that does stay the same is the, if you have non W2 income, it is important to learn from your desired lender. What aspects of your income are important to them, and if three years of proof of income will be required from the time of closing, it’s been a fun experience overall.

06:41 Hannah S: Ultimately, owning is significantly more expensive than renting because when things break, I am my own landlord and I get to fix them, and sometimes those expenses are more significant than I would like them to be. Uh, within the first kind of few months of owning my home, uh, both the washer and dryer that came out, the house broke, and so I needed to replace those. Um, and I found out that my non-mobile house had a mobile home shower installed in it, and all the plastic parts were degrading, so I needed to, uh, replace all that with copper piping and plumbers are expensive, and then any electrical issues become your problem, AC issues become your problem. So definitely get the home warranty. Uh, if you can include that in the conditions of closing and ha have it be something that the seller pays for, I would recommend that highly. And then I renewed it for a second year as well, cuz my air conditioning unit was pretty old. Um, and that ended up being the right choice for me just because the, the amount of maintenance that I required on, on that particular utility was, was significant in the second year as well. So yeah, hopefully you have as good of luck on your journey as I’ve had online and yeah, good luck going forward.

H, PhD Student: East Coast

08:00 Emily: This submission is from “H”, a PhD student who lives on the East Coast. Quote. I had a vague plan to buy my place in my second or third year of my program, but it ended up happening in a surprising and rushed way when a house came up right in my neighborhood, I had something like a month to close, which I did in August, 2020 at the beginning of the second year of my program. My income has increased since I got the house, so the monthly payment, including mortgage insurance and property tax, is now a little less than a third of my post-tax income. Initially it was closer to 40%. Having roommates in various configurations has offset between 25% and 65% of my payment at any one time. But there have also been months between roommates where I’ve been covering the whole amount. I’ve had kind of a revolving door of housemates, which has been a lovely part of having my house.

08:49 Emily: So far it’s been friends or friends of friends, almost all grad students because my roommates and I, I have so far always been gone for the summer, I rented out for more like 85% of the mortgage to people doing summer internships. Here it offsets the fact that my July and August stipend payment is lower than my 10 month academic year stipend payment. I charge less than market rent because I’m not a professional landlord and I don’t have a property manager. The house is old and not in perfect shape. When I’ve had water in the basement, a broken water heater or a broken window, people have been understanding and patience since I’m not charging a lot, I’m also able to undercharge because I have a financial safety net. My parents lent me almost all of the deposit and I won’t start paying them back until I finished my program.

09:33 Emily: Their justification was that they had paid the same amount for my siblings law school. We’ll pay them back interest free. I would’ve been able to get a place on my own, but it would’ve been smaller and I would’ve bought later. The fact that I have a financial safety net has made being a homeowner less stressful. I haven’t had to ask my parents for money for repairs so far, but I can sleep at night knowing I’d be able to borrow money from them if I urgently needed a new roof or something. I love having an old house, but because of the upkeep, I think it would be too stressful to own one without that kind of cushion. It was very much a pandemic home purchase. I remember reading all these articles in 2020 and 2021 about people who are desperate for more space when working from home and how they had overpaid for falling apart houses.

10:17 Emily: I was like, oh my God, is that me? Now with the interest rates up, the news is all about people who lucked out with 2% interest rates like me, and now their incentive is just to never sell. Sometimes I think about how my mortgage on the house is twice what I was paying for a one bedroom apartment and how I spent money on repairs and my bills are much higher than in the apartment. And I wonder what would’ve happened if I had plugged the difference into an index fund instead. But if the house has increased in value, as much as Zillow says the house wins out as an investment, obviously you have to take Zillow with a grain of salt. I think only time will tell whether this was a good financial decision or not, regardless of whether it turns out to have been a good investment.

10:55 Emily: I have so many great memories of this house. I love having space to host and being able to provide a gathering place, especially in the pandemic. When I hosted people from out of town who needed a break from being isolated alone in their apartments. I’ve loved becoming closer to my housemates. I’ve had friends stay in the house when their family were visiting from abroad and needed a place to stay. I feel happy that the house has helped people out with somewhere to stay when other solutions were expensive and logistically difficult. I’ve loved being able to host my family, especially at the holidays. A lot of this would just not be possible if I were renting. I know that buying a house is normally seen as tying you down, but for me, I think it’s given me the freedom to be mobile. Having the house has allowed me to be pretty flexible during the latter part of my program, which requires research abroad.

11:40 Emily: I offset the monthly payment by renting it out so I don’t feel like I’m obligated to stay there just because I’m paying for it. When I’ve worked abroad on a job that included housing or got grants that covered my housing while researching, I’ve been able to save a good amount of money, money by reducing my housing expenses, but I also didn’t need to formally move out and I know I can come back whenever because there’s still a spare room compared to having to deal with paying for storage and finding a place during awkward lease gaps. I’m able to be much more of a free agent than other people I know Doing dissertation research abroad, it’s just one of the many ways that being financially secure makes the experience of being a grad student dramatically less stressful. I think it’s important to recognize that my financial privilege and home ownership, along with my citizenship, have given me greater research capacities. I’m not sure what I’ll end up doing with a house after I leave the program. I might rent it out on a more formal basis or if I decide to buy elsewhere, I might sell. End quote.

Courtney Beringer, PhD Student: Corvallis, OR

12:37 Emily: This next submission is from Courtney Beringer, who was previously interviewed on this podcast in season 10, episode 18.

12:45 Courtney B: My name is Courtney and I’m a third year PhD student in civil engineering at Oregon State University in Corvallis, Oregon. Uh, I recorded a podcast with Emily shortly after I bought a house in 21, so I’ll briefly talk about that and dive into what has happened since then. I bought a house with my friend in July, 2021 in Corvallis, Oregon for about $250,000. It’s a three bedroom, two bath with an additional room that we converted into a bedroom. My co borrower and I live in the house along with our two tenants. Our mortgage is about $1,500 a month, and our rental income is, uh, $1,300 a month. Um, we were patient and took months to find a house that met our needs of being within about five miles of campus. Um, had rooms we could rent out and was under our budget of about $320,000. Our loan process was made, uh, a little complicated by having co borrowers who were not related or married.

13:50 Courtney B: And because we were both grad students with changing sources of income throughout the year, we worked with our loan officer through these hurdles and everything actually turned out great. It has now been two years as homeowners and with tenants. Uh, it has been great to have a passive side income through renters. We have enjoyed the freedom that home ownership has provided, uh, but home ownership is always unpredictable. We had a water heater leak in January this year, which caused my co-owner one of our tenants and I to live in a hotel for two months while demo and construction occurred in my room and our shared bathroom insurance covered so much. But this took a lot of time out of our studies and lives to move, make remodeling decisions and coordinate with contractors, and we just got a roof place, which added a $13,000 loan to our joint finances. Owning a house is all about the long game. We hope to see large returns on the remodeling and roofing work once we sell, but for now, we have to be willing to put a decent amount of cash down for deductibles, emergencies, and our new monthly loan payment. Uh, I hope my story gives you a sense of the joys and realities of being a homeowner.

Commercial

15:07 Emily: Emily here for a brief interlude. Would you like to learn directly from me on a personal finance topic, such as taxes, goal-setting, investing, frugality, increasing income, or student loans, each tailored specifically for graduate students and postdocs? I offer seminars and workshops on these topics and more in a variety of formats, and I’m now booking for the 2023-2024 academic year. If you would like to bring my content to your institution, would you please recommend me as a speaker or facilitator to your university, graduate school, graduate student association, or postdoc office? My seminars are usually slated as professional development or personal wellness. Ask the potential host to go to PFforPhDs.com/speaking/ or simply email me at [email protected] to start the process. I really appreciate these recommendations, which are the best way for me to start a conversation with a potential host. The paid work I do with universities and institutions enables me to keep producing this podcast and all my other free resources. Thank you in advance if you decide to issue a recommendation! Now back to our interview.

Anonymous, PhD Student: Atlanta, GA

16:26 Emily: This submission is from an anonymous contributor. When they mentioned Sam in the course of this contribution, they’re referring to Sam Hogan, a mortgage originator specializing in early career PhDs. And we’re actually gonna hear from Sam next

16:39 Emily: Quote. I purchased a home during the spring semester of my first year as a PhD in Atlanta, Georgia. I closed in April, 2023. I have been debating home ownership since 2020. I would be entering graduate school in my early thirties, so I wanted to try and build wealth so that I wouldn’t be too far behind in retirement savings or net worth. When I finished in my late thirties, my parents were not convinced that buying was the right move. So when I moved back home to Atlanta to start school, I ended up renting a beautiful old studio. But in January of spring semester, when I was informed that rent would be going up $200, I realized that I was ready to buy and that I needed it to happen fast.

17:18 Emily: I tried several different mortgage lenders, but most were rather confused by the stipend structure. I would get pre-approved based upon my credit score and lack of debt, but then would always receive several follow-up emails asking for documents from my university, asking for verification and explanations. I turned to Sam fairly early on, just asked him questions and then ended up going back to work with him after the other lenders didn’t work out. I received my pre-approval from Movement Mortgage with no follow-up questions and began house hunting. In late January, maybe eight or nine bids later, I finally landed on a home, not a condo, which had been my original call, but HOAs kept blowing my budget in late March with a closed date in early April. For a moment, there was a bout of panic because the house has an unfinished primary suite and we, Sam, my realtor and myself, didn’t know if it would pass appraisal the suite, huge bedroom, bathroom closet was essentially a bonus room or a garage.

18:11 Emily: The outside structure was finished, but there was nothing else. No drywall, no electric, nothing. Ultimately, the house passed appraisal, the seller contributed to closing and Sam even managed to get me a few hundred dollars back at closing. Looking back, this story sounds really straightforward, but it was super stressful. I also switched realtors during this process and I wish that I had done so earlier. I was also saving between $800 and a thousand dollars a month between January and April to make the down payment, and also ended up basically emptying my investment account and my Roth ira, both of which had less than $2,000 in them. I put 3% down on a home that was less than $200,000 a total steal in Atlanta. All in all, I’m glad that none of the other bids worked out. This home is spacious, has a lovely yard, is in a great location, and the unfinished primary suite will multiply the value of the home.

19:01 Emily: Of course, the house will need a lot of work, but I have a roommate and we’re both excited to get our hands dirty. My biggest piece of advice is to remember that the people who help you purchase your home need to advocate for you. Sam is a phenomenal advocate and helped me get into my first home and stopped at nothing to make the sale work. The realtor who I ended up working with was also an amazing communicator, and I wish that I had been working with him the entire time. Of course, save money and do your research, but remember that the people on your team matter. End quote.

Sam Hogan, Mortgage Originator

19:36 Sam H: Greetings. This is Sam Hogan. I help graduate students, postdocs and PhDs achieve home ownership in all 50 states. We’ve closed hundreds of loans for PhD students and postdocs. They have a unique, uh, income set and require unique mortgage approval process. Um, having done this for over four years now, we are the nation’s only lender that focuses on your success while you’re getting your degrees in higher education. My team is a longstanding advertiser and sponsor of PF for PhDs, and I am delighted to also be Emily’s little brother. So Emily reached out to me in, um, spring 2019, um, having seen a pattern of difficulties for PhD students, um, closing on home loans.

20:29 Sam H: The issue with PhD income is that the loan officer in the pre-approval stage will either pre-approve them and not do enough work themselves or deny them out the gate. Now, when an underwriter sees the PhD income after loan offer, pre, pre-approved them, them, it might not have enough information about the stability and continuance in history, and you also can be issued a denial because the underwriter doesn’t have to give you a final approval based on those offer letters. Um, after some a few months of investigating, we developed a system to properly document the income, the continuance, and the stability. Um, regardless of how soon or how late you are in your PhD stipend continuance, where I come in is demonstrating that the borrower who’s a PhD student has always been a full-time student, has always maintained a good gpa, has a track record of staying in the same field of science or research.

21:34 Sam H: We do have to over document a file sometimes to demonstrate continuance, but even if we have less than three years, we are able to help the underwriters understand the quality of individual behind this stipend income, which has helped us become successful in closing loans in this space. I will rescue PhD deals every single month. This happens often with, uh, new construction builders and their lender is completely unfamiliar. Or some other companies like, um, loan Depot for example, will just outright never accept stipend income. So those clients will read my reviews or, uh, find Emily’s blog where we give a little bit more of in depth information on how it works. Um, I’ll connect with them and they will become homeowners and protect their deposit, have a more stress-free approval working with us versus a lender. Loan officers. Not, not familiar. When we originally started helping PhD students and post-docs become homeowner, homeowners, we were more comfortable with having three years of continuance.

22:42 Sam H: So at the early years or maybe before your first semester of becoming a PhD student, that was our, um, bread and butter easy approvals with confirming that income. As we’ve done more PhDs and expanding to more states, we’ve actually seen some success helping PhDs who are in their later stipend years, years four, five, sometimes six. Um, so really we just need to make sure that we can show history and continuance. Even if you’re stipend might be ending in a few months, we can still help you. We just like to show the career field that you’re going into and some other details about your career path and your future successes. A lot of home buyers in this market are not excited about taking higher than a 5% rate, and I wanted to just encourage people that it is much more difficult to find the home than to get a mortgage on it. So we say in our industry, marry the house date the rate. Once you’ve found your home and rates improve, you’ll be able to refinance and lower your payments and lower your total interest paid. What you don’t want to do is wait for rates to get a little bit lower and then the market is flooded with buyers and you have more competition searching for that same home.

24:03 Sam H: Having to read originated loans for seven years working with the PhD community just makes my life such a breeze. Everyone is very responsive, calm, cool, and collective. They understand what I’m talking about and they’re willing to listen to me explain a little bit extra about the home buy-in process so they can have a better understanding of it. Unfortunately, there’s not a lot of standard education on how to buy a home or how to get a mortgage, but that’s okay because you have people like myself who are willing to take the time to help you understand and find success in this space. But working with the PhD community has been, um, so wonderful over the last four years. I I wouldn’t trade it for anything. Having to having clients who, um, are attentive to your requests. I, I will say well qualified, a good, good credit scores and goal oriented. If you’re committing, uh, five or six years to a new area and you don’t wanna waste five or six years worth of rent, you know, please reach out to myself. The best number to reach me is 540-478-5803. Um, and I’m looking forward to hearing from you. Happy hunting.

25:14 Emily: I host monthly. Ask me anything with Sam. So if you’d like to meet him and ask a question about mortgages or the home buying process, please register for our next one pfforphds.com/mortgage.

Outtro

25:32 Emily: Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Dr. Lourdes Bobbio and show notes creation by Dr. Jill Hoffman.

PhD Home Buying Updates for 2022

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In this episode, Emily interviews Sam Hogan, a mortgage loan officer with Movement Mortgage who specializes in graduate students and PhDs. Sam lists numerous housing markets where graduate students and postdocs are able to buy a home on a single income or two incomes and explains why the rising mortgage interest rates should not be a deterrent to buying. Sam also illustrates why qualifying for a mortgage with fellowship income has historically been difficult for graduate students and postdocs, but how he and his team have found a way to reliably get them approved. They wrap up the interview with explaining how Sam’s recent shift to working for Movement Mortgage is going to smooth the path to approval even further.

Links Mentioned in this Episode

S13E1 Image for PhD Home Buying Updates for 2022

Teaser

00:00 Sam: This is advantageous to the PhD community because there are other things that are so stressful about the home purchase. You know, putting a $20,000 deposit down can add a little, you know, you might lose half an hour of sleep every night. I don’t want anybody losing sleep because they’re well qualified over income like letters. It’s totally ridiculous.

Introduction

00:28 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. This is Season 13, Episode 1, and today my guest is Sam Hogan, a mortgage loan officer with Movement Mortgage who specializes in graduate students and PhDs. Sam lists numerous housing markets where graduate students and postdocs are able to buy a home on a single income or two incomes and explains why the rising mortgage interest rates should not be a deterrent to buying. Sam also illustrates why qualifying for a mortgage with fellowship income has historically been difficult for graduate students and postdocs, but how he and his team have found a way to reliably get them approved. We wrap up the interview with explaining how Sam’s recent shift to working for Movement Mortgage is going to smooth the path to approval even further.

01:46 Emily: Since we jump right into the discussion of mortgages in the interview, I want to take a moment here to prepare you for what’s to come! Sam has been on the podcast several times before if you’d like to catch up on our previous conversations. If you plan to listen to them all, please do so from oldest to newest. You can hear him on Season 2 Episode 5, Season 5 Episode 17, and Season 8 Episode 4. We have also held several live Q&A calls in the past in which Sam takes questions from grad student and PhD first-time homebuyers, and I’ve published a few clips from those calls on the Personal Finance for PhDs YouTube channel. We don’t have our next live Q&A scheduled yet, so if you’d like to be kept in the loop on that, please join my mailing list through PFforPhDs.com/subscribe/. Links to everything I just mentioned will be in the show notes. You’re going to hear me being pretty pro-homebuying during this interview because I get so enthused about it when I talk with Sam and reflect on my own rental and home ownership history. But I want to acknowledge up front that of course homebuying is not financially feasible for most graduate students and even if feasible is not necessarily the best financial or lifestyle decision. In my book, renting is a perfectly valid choice. Don’t feel pressured to buy by this interview. It’s more about encouraging graduate students and PhDs who are interested in buying that it may very well be possible for them and showing them how to do it. You can find the show notes for this episode at PFforPhDs.com/s13e1/. Without further ado, here’s my interview with Sam Hogan.

Will You Please Introduce Yourself Further?

03:35 Emily: We have an extra special episode of the Personal Finance for PhDs Podcast today because my guest is my brother, Sam Hogan, who is a mortgage loan officer with Movement Mortgage. And for the past several years, he has been specializing in writing mortgages for graduate students and postdocs and PhDs. And I’m just so delighted to have Sam on! By the way, he is an advertiser with Personal Finance for PhDs, and he’s going to give us some updates on what’s going on in 2022 and recent developments in the mortgage industry that’s relevant for our audience. So, Sam, thank you so much for joining me! And will you please introduce yourself a little further?

04:12 Sam: Thank you for having me. It’s Sam Hogan, I’m newly with an old employer, Movement Mortgage. And my NMLS number is 1 4 9 1 7 8 6.

04:23 Emily: And let’s get your contact information upfront in case anyone knows already that they want to get a quote from you.

04:29 Sam: Yes. So, my best phone number is (540) 478-5803. And the new email address for me is Sam dot Hogan at movement.com.

Homebuying Markets for Grad Students

04:41 Emily: As probably everyone listening knows, in 2022 we’ve seen a lot of rate hikes from the fed, which has trickled down into the mortgage industry. And so, I know that graduate students and PhDs are really concerned right now about still being able to afford to buy with these recent rate increases. So, can you tell us some examples of places or markets where you’re still seeing PhDs and graduate students able to purchase homes?

05:07 Sam: Yeah, absolutely. Some of our steady markets, I would say nationwide, are just pockets of the country where you can still find single-family homes or townhomes under $400,000. Whether it’s a PhD or postdoc buying on their own or with a partner. We see a lot of activity in North Carolina, and that’s within the Research Triangle and also outside of that area. I’ve had a couple of deals done in Winston-Salem for Wake Forest students. But outside of Chicago, Northwestern, those areas are good as well, including, you know, Philly, Providence, Rhode Island, for people who are going to school just across the bridge at Harvard or MIT. And also Austin, Texas, and outside of those city limits has been steady, no matter what the rate is. And I say that because with these lower-priced homes that are a little more affordable for PhDs, the interest rate, even when it goes up, it doesn’t make a huge, huge difference in your monthly payment.

06:14 Sam: Now, if someone was getting a high balance loan at seven, $800,000, when the rate goes up just a little bit, it makes over a hundred dollars difference monthly. Our first barrier and hurdle with the PhDs is, and will always be the monthly income. <Laugh> Not just including it, but finding a property that fits within that budget. You know, people who are debt-free and have a little bit of money to put down, still, it’s the monthly income that we say, Hey, 10% down is going to have to get the job done because the income is very tight.

06:49 Emily: Yes. Can you give us some examples there? Because I mean, you just threw out $400,000, which like is sort of breathtaking for me. And I assume that’s with two incomes, maybe people could afford that. Let’s talk about one income. Let’s talk about a PhD stipend. Maybe it’s $30,000 per year or something similar to that. If you had a person, a single person buying on their own with that kind of income of good credit score, no outstanding debt, I mean, we’re talking ideal candidate here. How much would they be able to qualify for with current interest rates? We’re recording this in August, 2022.

07:27 Sam: Most recent live data is a loan closing tomorrow and she purchased at $185,000 outside of Chicago with 10% down.

07:39 Emily: And what was her income?

07:42 Sam: She was a second-year student, I believe it was around $34,000 a year.

Keep an Open Mind to Possibilities

07:48 Emily: Okay. Okay. So, ballpark numbers. That’s great to hear. Obviously, like you said earlier, it’s going to be a stretch for a graduate student, especially a single one as I was just mentioning, to buy a home on a stipend. But there are some markets around the U.S. where this is still possible, and even more so if you do have a partner to buy with, or if your income is, you know, better than the average graduate student stipend. Basically, my message always when I bring you on is like, audience members do not completely dismiss out of hand the possibility of you owning a home during graduate school or your postdoc. At least look into it a little bit. Yeah. There are a lot of places where it’s not going to be possible, but you may be surprised that it is possible in some places.

08:27 Sam: Yeah. I mean, I have a client who is buying in LA right now, which people would immediately write off as way too expensive. She does have a second job that she has history of working. So, she’s able to afford a little bit more than just her stipend. I believe she’s going to UCLA right now. So, she’s still buying in the upper threes. You know, she does have 20% down, right? Which helps bring down that loan amount, but I’m only qualifying her off of the stipend and a small seasonal job. So, yes, she is looking at a studio with one bathroom, but that is what she knows she’s going to be comfortable with monthly. And I think just the biggest thing about owning in grad school is completely flipping your net worth, right? You could have a hundred thousand dollars of student loans going into grad school, but turn that into $200,000 net worth and then also rental property when you move out of the area.

09:31 Sam: So, even if it’s a studio, it’s still a wonderful stepping stone. You know, you get that first purchase out of the way and you realize, okay, you know, closing costs are basically the only thing I spent my money on that doesn’t go into equity on my home, right? And you know, learning these small steps of home ownership, like filing an insurance claim if you have to, or like, why do I have plumbing issues every month, right? Whatever, maybe my washer broke, what do washing machines cost, right? All these things are just, you’re going to learn them eventually, and the benefits of a five or six-year plan of you owning while, you know, progressing yourself personally is just unmatched, I would say.

House Hacking

10:16 Emily: Sam, you put that so eloquently, and long-time listeners are going to know I’ve said many times that one of my big financial regrets from graduate school when I went to Duke in the Triangle was not buying my first home when I had the financial means to, because I had a lot of limiting beliefs going on at that time about what home ownership was for graduate students. So, I won’t belabor that point right now, but if you want to go back and listen to some previous episodes we’ve had on home ownership, you can check out season eight, episode 18, where I talk a lot about my own limiting beliefs around home ownership during graduate school. And we’ve done multiple episodes with Sam as a guest in the past, but I would especially point you to season eight, episode four, which is when we talked about, the title episode is Turn Your Largest Liability into Your Largest Asset with House Hacking.

11:03 Emily: So, we talk a lot about what house hacking is, which is basically just when you buy a home that’s larger than what you need and you rent out one or more of the bedrooms to tenants slash roommates. And it can be a really powerful strategy for graduate students who are able to pull it off. So, especially go listen to that one because we, again, talk about all these like options for exiting a home ownership situation, if you are leaving the city, when you finish your graduate program or when you finish your postdoc. You could sell, but if it’s not the right time to sell, you could hold onto it, and it could become a rental, like Sam was just saying. Or there are other options as well. So, anyway, great episodes to listen to. Sam, is there anything that you want to add about like where graduate students in PhDs are buying and able to buy right now?

11:42 Sam: I can say reflecting on my last year’s worth of production, there were 17 states which I originated for PhDs last year, or I guess in a calendar year. I definitely see a lot of business in the Northeast. So, people who are going to any New Jersey, Massachusetts, Rhode Island, Connecticut area type of university. I actually had a very successful purchase for a student who goes to Yukon. His name was Joshua DuPont, and he implemented a wonderful house hacking purchase. Couple quick data points on it. He purchased at about $130,000. It was a two-unit, separate levels. The rental comp on the second unit was about $800 a month, which exceeded his mortgage by about 50 bucks. So, he was covering his entire mortgage by having that rental unit above his. I’m not sure which one he lived in, but it was a perfect example of someone who was making the commitment for five years, and then, I mean, his opportunity now financially is completely different than it would be if he was the person renting that unit from someone else, right?

13:05 Emily: I love to hear that. I’m so happy for him!

13:07 Sam: Yeah. And that’s actually the third PhD that bought a multi-unit.

Rates are a Moving Target

13:11 Emily: Wow! That’s so exciting! Okay. So far what we’ve heard is don’t discount home ownership. It’s possible in a lot of different markets. Secondly, rates are going up, but it won’t affect these on the lower end of home prices purchases as much as it will affect larger-scale home prices. So, still go ahead, get a quote from Sam, get a quote from somebody else, see what you can qualify for just based on your income.

13:38 Sam: I wanted to touch on rates one more time. You don’t want to be 100% focused on what rate you’re receiving. Because everyone at that time of the year is going to be in a similar boat as you. Rates have gone up, people will qualify for less at a higher rate, right? But the main goal is to find the right house within your budget. So, whether that is off of a 5% rate or a 6% rate, it still has to be a comfortable payment for you. Okay. So, while you’re looking for your home, rate is basically a moving target, right? What a lot of lenders implement is a float-down policy. So, my client in Chicago that’s closing tomorrow, when I locked her rate, she was up at 5.625. You know, condos have a little bit higher rates than single-family homes, but we’re able to lock at day one when we decided it’s a good time to lock.

14:41 Sam: And then also look at a second day in the future that’s before closing to see if the rate is better that day. In her scenario, the rates had improved for a few weeks. And so, we ended up floating down her 5.625 down to 5.1 at no cost to her. So really, when you’re locking your rate in, you’re just preventing the rate from getting worse, right? You’re locking in it at, let’s just say 5%, for example. Your rate’s never going to be over 5%. Should the market improve significantly before you close, ask your lender about a float-down option. They usually have one. I would say if they’re a competitive lender that does a lot of business, they have a float down policy. Okay. So, mainly, the point I’m trying to get across is, no matter what the rate is, even if it’s at 10%, don’t be discouraged from buying, because you still have the equity you’re going to gain in the home, the amount you’re going to pay your loan down, your tax write-offs, and the ability to either keep or rent out that home after you don’t want to live there anymore. So, all these things, compared to paying rent, rent is a hundred percent interest. The only good thing about paying rent is you get to call your landlord and say, Hey, I have a problem. Instead of dealing it with yourself.

15:55 Emily: That is a good benefit of renting, and one that I miss.

15:57 Sam: It’s the best benefit. Yeah.

15:59 Emily: I appreciate your points about still buying even at higher interest rates, if you qualify, right? The question is, if graduate students were at that tippy top max of their budgets anyway, and increasing rates have caused their monthly payment to go up to such a point where they could no longer even afford a house anywhere in that market, if they were on the bubble like that, then it’s an issue. But if you could still qualify at the higher rates, like you said, I still think it’s a reasonable idea to go forward with buying. Especially because, you know, let’s say next year or the year after that rates are lower, again, that person can refinance. As we saw so many people do with low rates over the past 10 years. And so, it’s not necessarily that that rate is going to be your rate forever. As long as you can still get into the property. So anyway, it’s worth investigating.

Buying Down Your Rate

16:44 Sam: Okay. So, I’ll add these details from what I experienced originating at higher rates right now. Like you just said a moment ago, you’re already on a tight budget. That’s not changing. And rates going up, you’re going to qualify for a little bit less. It’s not going to take you out of the market because now the rates have gone up, and home prices are actually starting to come down in some areas, right? You’re not going to go, you know, over contract price plus 10 grand to get into the home. Okay. So prices will adjust for a smaller buy approval that doesn’t qualify for certain amounts, right? And then secondly, usually PhDs are putting down savings or they’re receiving a gift from a family member or a friend. Some even are selling a previous home and buying another one, right? So, the $5,000 you needed from a family member to close, you know, planned on, might be $10,000 now.

17:44 Sam: You might just have to put a little more down to qualify for that house you want, right? Then again, I still have people buying single-family homes in North Carolina for under $150K. So, if you don’t need more than three bedrooms, you’re going to be able to find something. And then the last thing I wanted to point out is the realtor that you decide to work with is important because they’re going to work hard to find something that fits your budget. What we know already to start is that it’s going to be a tight budget monthly. So, I want to get my eyes on every property that you’re going to put an offer in to make sure it fits for your scenario. So, the room for error is very small here.

18:29 Sam: What’s very unlikely is that you’re looking for a home and I’ve preapproved you at five and a half percent. And during that period, rates go up to six and a half, and now you don’t qualify. That won’t happen. Because the cost to buy down the rate, if it were to go up, would be minimal. So, the rate that you don’t pay for has gone up, but if you are willing to put 1% or even 2% of your loan amount to buy down your rate, we can do that. Sometimes it’s cheaper to buy down for a lower rate versus getting another five or $10,000 to put down towards your loan. So even with the tight income monthly for one, you know, grad student on a stipend, it’s still achievable.

19:21 Emily: That’s really good to hear.

Commercial

19:25 Emily: Emily here for a brief interlude! These action items are for you if you recently switched or will soon switch onto non-W-2 fellowship income as a grad student, postdoc, or postbac and are not having income tax withheld from your stipend or salary. Action item #1: Fill out the Estimated Tax Worksheet on page 8 of IRS Form 1040-ES. This worksheet will estimate how much income tax you will owe in 2022 and tell you whether you are required to make manual tax payments on a quarterly basis. The next quarterly estimated tax due date is September 15, 2022.

20:07 Emily: Action item #2: Whether you are required to make estimated tax payments or pay a lump sum at tax time, open a separate, named savings account for your future tax payments. Calculate the fraction of each paycheck that will ultimately go toward tax and set up an automated recurring transfer from your checking account to your tax savings account to prepare for that bill. This is what I call a system of self-withholding, and I suggest putting it in place starting with your very first fellowship paycheck so that you don’t get into a financial bind when the payment deadline arrives. If you need some help with the Estimated Tax Worksheet or want to ask me a question, please consider joining my workshop, Quarterly Estimated Tax for Fellowship Recipients. It explains every line of the worksheet and answers the common questions that PhD trainees have about estimated tax. The workshop includes 1.75 hours of video content, a spreadsheet, and invitations to at least one live Q&A call each quarter this tax year. If you want to purchase this workshop as an individual, go to PF for PhDs dot com slash Q E tax. Now back to our interview.

Getting Ready to Purchase

21:29 Emily: Both of us have mentioned a couple times so far, like, okay, you know, ideal buyer candidate, like zero debt, and like, okay, how much money do you have to put down? Is it 5K? 10K? More? Let’s lay out for the listers right now, let’s say for someone who is really thinking they’re going to buy, maybe it’s within the next few months or next year, what can that person do within their finances and their life overall kind of to get ready to be in a good position to make that purchase a little ways down the line?

21:58 Sam: Well, you want to have a full understanding of where you stand credit-wise. [Annualcreditreport.com], we’ll have to check that for the show notes, but once a year, every consumer can get a copy of their credit report.

22:19 Emily: I just looked it up. It is annualcreditreport.com.

22:22 Sam: You really want to make sure that you have some money saved, you’re at a good credit standing, and you’re, I guess, mentally prepared to lose out on a couple deals before you find the right house. <Laugh> I would also say, if you do believe you’re going to be receiving a gift, to have that conversation a little earlier on in the process. We really don’t like to transfer money until we know things are done deal, but you know, prepping a family member or a spouse like, Hey, are we prepared to move around 10 or $20,000 to get this deal done, right? And then aside from credit and assets, your other main player is your income. We talk a lot about stipend income. I might know it better than some universities, but be aware of if your funding is changing. Usually, we have these annual increases.

23:25 Sam: But when that goes into effect, sometimes I receive funding letters that haven’t been officially signed. I’m like, we need to make sure you have a signed funding letter. And we do want to see some continuance, but we are not like every lender. We can still approve income even on a short-term contract. We look at the full picture, and Movement Mortgage uses common sense underwriting. So, if I can just show that you’ve always been in good standing as a student, and now you’re transitioning to this PhD in, you know, X science field or arts and sciences that we support you. We understand you’re a good borrower. We just, you know, there are obviously no guarantees because we want to make sure people fall into the right credit buckets, have the right assets, and the trio of how you qualify someone, right?

Advocacy for Grad Students with < 3 Years Continuance

24:24 Emily: Let’s talk a little bit more about that, because in one of our earlier episodes, it was quite a while ago now, season five, episode 17, we talked about this term continuance that you just mentioned. And at the time, again, it was a few years ago, the way things were understood regarding fellowship income–by fellowship, I mean, non-employee income, non W-2 income, awarded income is what I call it for my tax purposes. What we understood at that time was that fellowship income was sort of viewed differently than employee income, W-2 income, with respect to qualifying for a mortgage. And I was getting a lot of messages from graduate students and postdocs who were saying, oh my gosh, I was denied. I couldn’t get a mortgage. I couldn’t buy the home that I expected to because of the type of income I have. Not the amount of income, but the type of income.

25:13 Emily: And so, you looked into this, this is sort of how, you know, we started kind of collaborating together several years ago, you looked into this and one of the first things you found was, oh, well, if you have three years of continuance stated explicitly in your offer letter, which means this funding is guaranteed for three years, think like National Science Foundation Graduate Research Fellowship Program, it’s going to continue for three years. If that’s in the offer letter, oh, no problem. You’re golden. We’re going to be able to write that mortgage easily. Now that’s what we said in that earlier episode, but there has been some development since then, as you’ve been working more and more in this industry, you’ve actually gotten a lot of other types of people on fellowship approved. So, can you tell us more about the updates on that and the success stories that you have that don’t involve W-2 income and don’t involve three years of continuance?

25:54 Sam: Yes. So I have to kind of break this down into layers. So, what all lenders–that’s banks, mortgage companies, anybody who’s given a mortgage out for, I’ll say conventional loan–they have to go by the oversight committee, right? Fannie Mae, Freddie Mac, right? Fannie Mae and Freddie Mac have guidelines. And they are just mortgage laws everybody has to work with. Now, as you get down to the company that you’re working with, that company will also have a set of mortgage laws that are on top of what Fannie and Freddie consider, what they will ensure and take, right? Now, under that layer is your underwriters. The underwriter is similar to a loan officer. They’re a licensed employee of the company, and their license number is attached to every single loan that’s approved and closed. Okay. The underwriter basically can go either way with the income, right?

26:56 Sam: And a lot of times, a couple years ago, for me, I would always have to escalate my underwriter’s decision to their manager. Because the way the guidelines are written, they can be interpreted different ways, right? So let’s say this, actually, this is a real scenario that I got three weeks ago. Her name was Jane. She was buying in New York and she has exactly three years of continuance. Now the lender denied her because one month after the close date is when your mortgage starts and you paid in arrears. So you basically skip a month after closing. Well, when the payments start, she was under her three years continuance. So they said, I’m sorry, you don’t have enough time in your contract, right? So she got denied, found us online. I got her back on track. Her income’s been approved with Movement Mortgage, and she’s going to close on time without issue up in New York. As you get down to these layers, if you’re not working with the right people, you’re running into more and more issues. So what I’ve been able to develop is a way to present PhD income to an underwriter demonstrating historically where this student’s been, and where they’re gonna be going in the future. Technically speaking, the guidelines say the income must be likely to continue for three years. Okay? Now, if the underwriter can see that it’s not going for three years, they can say, I’m not budging. I can’t use this income. My license is attached to this. No. Right? Go get a co-borrower.

Interpreting the Word “Likely”

28:39 Emily: Because they’re interpreting the word likely in the way we would say guaranteed. They want to see a guarantee to think that it’s likely. But what you’re saying is, well, no, the word is not guaranteed. The word is likely. So how can we work with that word?

28:53 Sam: Right. I did a lot of due diligence before moving over to my previous employer Movement Mortgage, and I was able to get a guarantee from the whole entire company’s underwriting manager that I can take a PhD or postdoc with less than three years of continuance. Some less than one year. I can take them to a Freddie Mac product or a Fannie Mae product. This is advantageous to the PhD community, because there are other things that are so stressful about the home purchase. You know, putting a $20,000 deposit down can add a little, you might lose a half an hour sleep every night. I don’t want anybody losing sleep because they’re well qualified over income, like letters. It’s totally ridiculous.

29:42 Emily: This goes to that term that you mentioned earlier, common sense underwriting. Because I think the people listening to this podcast can clearly see from their own lived experience that graduate student income, whether it’s employee income or non-employee income, is pretty likely to continue. It’s certainly not more or less likely than some random job you might have, right? So like, we know as a community that this is very similar to another job. In fact, in some cases can even be more secure than a regular job. But the mortgage industry historically has not taken the same view until you, you know, went hard at work on this problem and started understanding the underwriter’s point of view, started understanding how you can present these packages, the language that they use. And like you said, with this most recent move, even prepping the underwriters at the company that you’ve recently moved to, Movement Mortgage, prepping them by saying, this is the type of, you know, letters and income verification that’s going to come your way. I need to know that you’re on board with this interpretation of the word likely and all the other factors that go into it.

30:42 Sam: Yeah. And one other thing about stipend income that was one of the main reasons I switched is universities will either pay their students on a 12-month pay cycle, or they will get paid semesters, right? So, where I was able to include someone’s fall and spring stipend, the summer stipend, because the pay changes, it’s a different pay rate. A previous underwriter at my old company was like, oh, we can’t use that income. It’s future income and it’s not guaranteed. And I debated with them. I said, the letter states that summer employment is often available for PhDs, but it’s not required. Meaning if you want to go to Europe, you’re allowed to go. But if you want to teach, here’s $6,000. That client of mine, he was able to get a co-borrower to solidify the $500 that they didn’t want to include monthly.

31:40 Sam: I took that same scenario and provided it to the underwriters at Movement. And they said, we see that he’s historically worked summers. And we see that he has this option to work as a teacher. And I was conservative. I did not include the higher income that I could have. He made, you know, $30,000 working for a different company the previous summer. I was like, I just went off the $6,000 that was within the letter. I would be able to close that here at Movement without the co-signer. And that just helps me get my PhDs closed with less friction. Because I see it as this is available income for next summer. So you get these layers, like what Fannie and Freddie will require, the lenders are a little more strict, and then the underwriter, you know, they’re on the edge of the fence. It could go one way or another. I couldn’t be happier working with PhDs. They’re responsive, understanding, usually very qualified, and they’re very, there’s no heavy lifting with doing these PhDs anymore. The back end, my team behind me, they’re the best community to work with. And it just doubles down of why they’re great people to approve for mortgages.

Reach Out to Sam at Movement Mortgage

32:54 Emily: Listeners, Sam does not just say these very complimentary things about you on the podcast. He says these things to me regularly about how happy he is to be working with you all. That you are such easy clients to work with, that you’re so responsive, that you’re so ready, that you’re so organized, you’re so responsive to email. Like you’re a great community for him to be working with. He’s really happy about this. Obviously, we have this personal connection that helps start it, but he’s off on his own now. Like he is clearly the industry leader in this area. So anyway, if it hasn’t already been clear through this conversation, Sam is working hard for you. Especially if you’re going to be buying a house in the near future, on your graduate student or postdoc income, his recent move to Movement Mortgage, he obviously did a lot of work on that. Making sure that things like inconsistent income throughout the 12 months will be included in your consideration for a mortgage.

33:44 Emily: So, all that to say, Sam, let’s wrap up here. I, of course, strongly encourage anybody listening or reading this transcript who is considering qualifying for a mortgage in the near future to at least get a quote from you. Doesn’t mean you can’t get quotes from other people, but at least get a quote from Sam. See what he can do for you. And he has probably the most experience working with this particular population of anyone in the U.S. I don’t know. Maybe there’s some random person in one random college town somewhere who also does this, but Sam works nationally. So, please go get a quote from him if this is on your radar at all to see what you could qualify for on your income and with the current interest rate. So, Sam let’s conclude one more time with your contact information.

34:23 Sam: Yes. My cell phone is the best way to reach me. It’s 5 4 0 4 7 8 5 8 0 3. And my new email address is Sam dot Hogan at Movement.com.

34:35 Emily: Well, Sam, it’s been a pleasure to have you back on the podcast. Thank you so much for the work that you do for this community and how much you care for them!

34:42 Sam: Thank you for having me!

Outtro

34:49 Emily: Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.

How Two PhDs Bought Their First Home in a HCOL Area in 2021

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In this episode, Emily recounts her and her husband’s home ownership journey, what she’s learned along the way about buying a home, and what she wishes they had done differently. The episode is structured around the necessary elements in your life and finances to qualify for a mortgage and purchase a home: 1) desire to buy a home, 2) income, 3) debt-to-income ratio, 4) credit score, 5) down payment and closing costs, and 6) someone willing to sell you a home. In each section, Emily speaks about the element generally and takes you through their own history to show you how all these elements finally came together in 2021 to enable the purchase of their first home.

This is post contains affiliate links. Thank you for supporting PF for PhDs!

Links Mentioned

Introduction

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 8, Episode 18, and today I’m going to recount for you my and my husband’s home ownership journey, what I’ve learned along the way about buying a home, and what I wish we had done differently. I have structured this episode around what I understand as the necessary elements in your life and finances to qualify for a mortgage and purchase a home: 1) desire to buy a home, 2) income, 3) debt-to-income ratio, 4) credit score, 5) down payment and closing costs, and 6) someone willing to sell you a home. In each section, I’ll tell you about the element generally and take you through our own history to show you how all these elements finally came together in 2021 to enable the purchase of our first home.

Purchasing a home in the San Diego area has been a decade-plus-long dream for us. My biggest long-term motivator for staying on top of my personal finances was not debt freedom, not financial independence or early retirement, not lifestyle spending, but rather being able to buy a home in southern California and live a financially stable life with children.

Whenever I met people who used to live in San Diego, I asked them why they moved away, and if the answer wasn’t being transferred by the military, it was nearly invariably financial pressures. I knew it would take all of my financial skills just to make it in this high cost of living area, so that’s what I’ve been working toward all these years.

My husband and I closed on our very first home purchase in north San Diego County in April 2021. So not only did we accomplish one of our major life goals, we did it in the strongest nationwide seller’s market in recent memory.

As I tell the story of our journey to home ownership, I’m going to get really personal and transparent, which I don’t often do on this podcast. I am going to give some advice and suggestions as we go through, but please keep in mind that this episode is largely descriptive of our path, not prescriptive for yours. You will see that we’ve had privileges and opportunities that are definitely not available to everyone. COVID-19 in particular greatly influenced the end of this process, which of course we all hope will not be repeated.

I know that my story, especially the end when I start giving you numbers, will feel quite unrelatable to those of you who are still in grad school or who live in low- or medium-cost-of-living areas in the US. They certainly were for me when I was a grad student in Durham. Yet, multiple years out from finishing my PhD, here I am living it. If eventually buying a home in a high cost of living area is something you want, I hope you will find our story inspirational. If your goal is to buy a home soon, I hope you will find it educational.

If this episode raises new questions for you about the home-buying process or you’ve had some kicking around for a while, I invite you to join me and Sam Hogan for a free live Q&A call this coming Thursday, May 6, 2021. Sam is a mortgage originator specializing in graduate students and PhDs, particularly those with fellowship income. He is also an advertiser with Personal Finance for PhDs and my brother. You can register for the call at PFforPhDs.com/mortgage/.

In case you are a new listener, here is some brief biographical info so you can follow along with the episode:

My husband Kyle and I met and started dating at Harvey Mudd College, from which we graduated in 2007 at the age of 21; we both turned 22 in July 2007. Kyle started his PhD in computational biology and bioinformatics at Duke University in fall 2007; I did a postbac fellowship at the NIH for a year before starting my PhD in biomedical engineering at Duke in fall 2008. We got married in summer 2010. We defended our PhDs in summer 2014. Kyle stayed on as a postdoc in his PhD advisor’s lab for another year, while I worked a few part-time / temporary jobs while I launched Personal Finance for PhDs, which has been my main endeavor since. In summer 2015, Kyle got a job at a biotech start-up, and we moved to Seattle. We have two children, born in 2016 and 2018. In summer 2020, Kyle negotiated to work remotely permanently for the start-up, and we moved to southern California, specifically the Los Angeles area. We closed on the purchase of our very first home in North San Diego County in April 2021.

The six necessary elements to buy a home are:

  1. Desire to buy a home
  2. Income
  3. Debt-to-income ratio
  4. Credit score
  5. Down payment and closing costs, and
  6. Someone willing to sell you a home

In the rest of the episode, I’ll tell you how we checked off each of these elements and give you some pointers as well. By the way, this episode is for entertainment purposes only, and nothing in it is advice for legal, tax, or financial purposes for any individual. You are entirely responsible for your own financial decisions.

1. Desire to buy a home

Before even dipping your toe into the home-buying process, you have to actually want to buy a home. It’s not something that you can or should just fall into. And if you don’t want to buy a home, none of the rest of the elements matter.

Kyle and I do not find the idea of home ownership to be particularly attractive. We have been very happy to rent for these last 14 years in the sense that we like that our landlords have had the financial and logistical responsibility to take care of the properties we’ve lived in. We’ve never cared about not being able to customize the space we’ve lived in or anything like that. However, we did idly consider home ownership in some earlier stages of our careers.

Neither of us was in a position to buy a home financially at the start of grad school. We did know some other grad students who owned their homes in Durham, so it was perhaps feasible to buy a small home with a grad student stipend. I actually interviewed Dr. Matt Hotze, a house hacking grad student at Duke, in Season 3 Episode 3. However, anecdotally, all the grad student homeowners we knew personally had purchased their homes before the subprime mortgage crisis, no later than 2007. Lending standards were obviously a lot looser before the crisis than during and after.

The subprime mortgage crisis and the Great Recession had a very big effect on my outlook on home ownership, as I believe they have for many Millennials. The first chapter of The Psychology of Money by Morgan Housel (affiliate link—thanks for using!) discusses why individuals view money so differently from one another. The way he puts it is: “People do some crazy things with money. But no one is crazy… People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.” His examples in the chapter of common financial experiences of various American generations include the Great Depression, high inflation in the 1970s, low inflation since the 1990s, the stock market’s high returns over the last 50 years, and the Great Recession.

Housel calls your teens and 20s “your young, impressionable years when you’re developing a base of knowledge about how the economy works.” Well, my early to mid 20s money mindset was scarred, as Housel puts it, by the housing crisis. By the time I reached my mid-20s, the mantras “Your home is not an investment” and “Don’t buy a home that you don’t plan to stay in for at least five years” had settled in deep.

Now, that five-year rule, that’s a tough one for early-career PhDs. Most of us expect to be fairly itinerant—moving cities, states, or countries for grad school, a postdoc, a first Real Job, a second, etc. You have to be really intentional as a PhD to stay in the same city for longer than 5 years, often making some kind of career sacrifice or concession to do so.

This is the dilemma that Kyle and I found ourselves in back in 2010. We had just gotten married and combined households and finances. The housing market was not strong by any means but it seemed that the worst was over. Our two grad student stipends were certainly enough to support a mortgage on a small home in Durham. We had a small amount of savings. Yet, Kyle was three years into his program and I was two years into mine. We thought, surely we will be leaving Durham by 2013, more or less. There wasn’t time, according to the 5-year rule, to have the reasonable expectation that we wouldn’t lose a bunch of money on buying and selling a home. So we didn’t buy. We focused our financial energy on retirement investing instead.

In hindsight, I learned the wrong lesson from the subprime mortgage crisis, or at least I applied a good lesson in the wrong way.

Here are a few things I’ve learned since 2010:

1) Personally, we didn’t actually move away from Durham until 2015. So we would have passed the 5-year rule anyway if we had bought shortly after getting married. The lesson there is: You might stay in your current city longer than you initially expect to. PhDs can take a long time. Keep a realistic timeline in mind in addition to an optimistic one.

2) If you own a home and then move away, you don’t have to sell it if your home hasn’t appreciated enough yet. You can rent it and become a long-distance landlord, likely with the help of a property management company. In 2012, we rented a townhouse from a private landlord through a property management company. The owner had earned her PhD at Duke and subsequently moved to Europe for a postdoc. Matt Hotze also employed this strategy when he moved away from Durham after finishing grad school.

As I record this, Scott Trench and Mindy Jensen of Bigger Pockets recently published a book titled First-Time Home Buyer: The Complete Playbook to Avoiding Rookie Mistakes (affiliate link—thanks for using!). I have not read the book yet, but I have listened to them go on the podcast rounds to promote it, and I’ve learned something just from that. One of the concepts in the book is on exit strategies from real estate purchases, namely: 1) live in it forever, 2) sell it, 3) rent it. When you buy a home, you should have more than one exit strategy that is a viable option for you.

What I want you to take from this point is that your home ownership clock does not need to stop when you move away from your current city. If it does take 5 years for your home’s rise in value to justify the transaction costs of real estate, which are very high, you don’t have to actually live in the home for all 5 years. Therefore, when you buy a home that you don’t plan on living in forever, whether that’s because of an anticipated move or growing your family or anything else, make sure that it makes financial sense as a rental as well as a primary residence.

3) Instead of relying on passive appreciation to increase your home’s value over a timeline like five years so that you can break even vs. renting, you can instead approach your primary residence with a real estate investor frame of mind. I’ve learned of two ways to do so through The House Hacking Strategy by Craig Curelop (affiliate link—thanks for using!), though there may be more.

The first method is forced appreciation, which is when you upgrade your home while you’re living in it through renovations or an addition or something similar. I don’t know how accessible that method would be to the average PhD; it’s not something that I would feel competent or confident to undertake in a cost-effective manner.

The second method is house hacking. I’ve already mentioned that term once in this episode. House hacking is when you buy a home that’s bigger than you need and rent out part of it. This could be a single family home where your tenants are your roommates or a multi-family property where your tenants are your neighbors. Assuming the ability to buy a home in the first place, I think this strategy is quite accessible for especially graduate students, who are accustomed to roommate living. I have had multiple house hacker interviewees on the podcast, including Matt Hotze, Jonathan Sun in Season 2 Episode 5, and Dr. Caitlin Kirby in Season 6 Episode 16. House hacking is an incredibly powerful strategy, which if done right can either reduce your housing expense or even eliminate it entirely and give you an additional stream of income. I discuss this strategy in depth with Sam Hogan in Season 8 Episode 4.

The upshot is that I wish I could go back in time and tell my early grad student self that living in Durham for grad school was a wonderful and rare financial opportunity. I would tell myself that buying a home with an eye toward renting it out, whether through house hacking or long-distance landlording, greatly mitigates the risk of buying in a city you don’t plan to live in forever.

That pretty well summarizes my aversion to home ownership and what I wish I had known about home ownership in my grad school years. Since I am unable to communicate with my past self, I hope you find it valuable.
In 2015, Kyle and I moved from Durham to Seattle, and that was quite a shock to our financial system. Kyle’s income jumped, of course, but suddenly our cash savings seemed pretty paltry compared to our new living expenses. Buying a home was no longer on the table. Instead, we rented a cheap apartment that was walking distance to his new job and focused our energy on growing our careers and our family. I’ll tell you more about how those years went for us financially later on in the episode.

By the time we were ready to reconsider the home ownership question in about 2018, we looked around and saw that Seattle was experiencing double-digit growth in its median home price and had been for several years. We had numerous friends buying or trying to buy in a super competitive market, doing things like waiving inspection contingencies. That didn’t sound appealing. Plus, going back to the previous discussion, we didn’t want to be in Seattle forever. I told Kyle when we moved there that I wanted to move to southern California within two to four years, and it had already been three. Instead, we decided to focus on building up a down payment on a home in California.

That brings us to the present, more or less. Home ownership was not super desirable for us in the past based on our location and mindset, but now it is. We have two big reasons for wanting to be homeowners at this stage in our life: 1) As a financially-minded person, I love the idea of, as Ric Edelmen puts it, carrying a big long mortgage. Doubly so with interest rates being as low as they are. 2) We, ideally, want to provide our children with a geographically stable home throughout their school years, which both of our sets of parents did for us. Our older child is entering kindergarten in fall 2021, so we knew we wanted to buy in 2021 if not sooner.

What I want you to take away from this section regarding whether or not you desire to become a homeowner is that you not should go on your feelings only. Your feelings matter, but purchasing a home or not purchasing a home is a big decision that should be well thought through. What are your motivations for home ownership? What are your exit strategies if you decide to buy? How can you use your home to increase your net worth, aside from passive appreciation? What are your other financial goals, and how do they rank against home ownership?

2. Income

Your income as an individual or household is one of the factors that determines the upper limit of the purchase price of your home. Income is the main sticking point keeping graduate students and postdocs from being able to buy in cities that their age-mates with Real Jobs could buy in, and that is due to the relatively low amount of income and sometimes the type of income.

First, I’ll address the type of income.

Employee or W-2 income is the easiest income type for lenders to understand and process. Basically, if you are an employee, the lender presumes that your job will continue indefinitely and that you will be able to pay your mortgage. You could potentially get a mortgage with just a single pay stub or an offer letter. Once the mortgage is close to being issued, they do check with your employer to verify that you’re not about to be let go or something similar.

Kyle has W-2 income through his job, so we knew that would be an easy sell.

Self-employment income is also common for lenders to work with, but they ask for at least two years of tax returns and profit and loss statements to ascertain whether the income is stable. Also, self-employment income will not qualify you for as large of a mortgage as an equivalent amount of W-2 income would.

I’m self-employed, and I was really concerned about how a lender would view my income. I wanted to wait to apply for a mortgage until after we filed our 2020 tax return because my income was higher in 2020 than 2018 so I thought that would help us qualify for a larger mortgage.

Fellowship income is the last income type that is common for grad students and postdocs. I hear frequently from grad students and postdocs who have been denied mortgages because the lender either doesn’t understand or can’t work with fellowship or training grant income. We’ve discussed qualifying for a mortgage with fellowship income in depth on the podcast in Season 2 Episode 5 and Season 5 Episode 17. Lenders view fellowship income as temporary, not indefinite like employee income, so they are concerned that you won’t be able to pay the mortgage after the fellowship ends. I know this sounds backwards to us because fellowship income is guaranteed over its term as long as you remain in good standing, whereas most employees can be fired at any time. However, it is possible to qualify for a mortgage with fellowship income under certain conditions and if you use a lender who is accustomed to working with it. Anyway, if after listening to the aforementioned episodes you still have some questions about whether you could get a mortgage with your particular funding situation, please come to the Q&A call on May 6th with Sam Hogan, who again is a mortgage originator specializing in fellowship income. You can register for the Q&A call at PFforPhDs.com/mortgage/.

Second, I’ll address the amount of income.

You may have heard a rule of thumb that you shouldn’t buy a home for more than three times your annual income. I learned through my own home-buying process that 3x your income is an outdated rule of thumb. Because interest rates are so low right now, people without other debt might be able to qualify for mortgages around 5x or more of their income.

The real metric that lenders go on is your debt-to-income ratio. There are actually two debt-to-income ratios, the front-end and the back-end. I’m going to address the back end debt-to-income ratio as a separate element.

Your front-end debt-to-income ratio is your total monthly housing expense divided by your gross monthly income. Your monthly housing expense includes the principal and interest payment on your mortgage, property tax, homeowner’s insurance, private mortgage insurance, and/or homeowner’s association dues. Lenders usually want your housing expense to be no more than 28% of your gross income, although depending on your loan type and credit history, some lenders might go above that number  .

Basically, this front-end debt-to-income ratio is a major factor in calculating the maximum mortgage amount you will be extended. However, what I’ve learned through my own home-buying process and my conversations with Sam is that the amount you’ll qualify for is a bit of a black box. If you want a definitive number, you’ll need to work with a mortgage broker or originator on getting pre-qualified or pre-approved.

Regarding our own homebuying journey, obviously real estate in the San Diego area is very expensive. We had to decide how much we were comfortable spending on a mortgage, regardless of the amount we qualified for, and match that up against the prices of single-family homes. There are a lot of cities and areas in San Diego County that we absolutely could not and would not buy in, and even in the remaining areas we were only looking at pretty modest homes.

When we started homing in on our target range of home prices, Kyle’s income was borderline enough to qualify for that range on its own without including mine. We were really, really fortunate when, just after we made our first offer on a house, Kyle received an unexpected and substantial raise. His income with that raise was more than enough to cover our target range. Ultimately, we went forward with his name only on our mortgage since we didn’t need to use my more complicated self-employment income.

3. Debt-to-Income Ratio

In this section, we’ll discuss the back-end debt-to-income ratio, which many people refer to as simply the debt-to-income ratio. Your back-end debt-to-income ratio is your total monthly debt payments and certain other obligations divided by your gross monthly income. The numerator is inclusive of your proposed housing expense that we delineated when discussing the front-end debt-to-income ratio.

Aside from your housing expense, the other debts and obligations included in the back-end debt-to-income ratio are the minimum payments you are required to make on credit cards, car loans, medical debt, personal loans, and child support. If your student loans are in repayment, those minimum payments go into the calculation as well. If your student loans are in deferment, your lender may consider 1% of the outstanding student loan balance as a stand-in for the monthly payment.

The maximum back-end debt-to-income ratio permitted by lenders varies widely from about 36% to sometimes over 50%, depending on the type of mortgage and the rest of your financial profile. Again, it’s a bit of a black box, so if you think your back-end debt-to-income ratio is what will limit your ability to get a mortgage of the size that you want, speak with a mortgage originator like Sam Hogan.

Kyle and I have been essentially debt-free for many years, so in our case the front-end debt-to-income ratio equals the back-end debt-to-income ratio. I bought a car at the start of grad school with a personal bank loan, but I paid that off during grad school and have since sold the car. We own one car currently, and it’s Kyle’s college car. It’s a 2003 Chevy so pretty unglamorous, but that is literally how we roll. I had student loans from undergrad that we paid off a couple of years after we finished grad school. We use credit cards, but we pay them off every month. I think we may have financed a cell phone or two at 0% instead of parting with cash, but we’re done with those payments now as well. Kyle has essentially never been in debt aside from the kind that builds your credit without costing you any money, and I haven’t taken out any new debt since I was 23.

4. Credit score

Your FICO credit score and the three major credit reports it is based on are the major ways that your lender will determine how credit-worthy you are. Basically, your credit reports and score communicate how responsible you have been with debt in the past.

If you’ve never had any kind of debt, you don’t have a credit score, and then lenders, if they even want to work with you, have to do a lot more legwork, or what’s referred to as manual underwriting, to figure out if you’re credit-worthy. That’s pretty ironic because if you’ve never taken out any debt and always paid your bills on time, you’re probably very responsible with money.

On the other hand, if you have lots of outstanding debt, that’s going to hurt your credit score.

The middle ground with debt is optimal for cultivating a high credit score, which is taking out small amounts of debt and proving that you can pay it back consistently. As your age of credit grows older, your score improves as well because that track record of on-time, in-full payments gets longer.

Exactly how a FICO credit score is calculated is proprietary, but the broad strokes are that 35% is based on your payment history, 30% is your amounts owed, 15% is the length of your credit history, 10% is your credit mix, and 10% is new credit inquiries.

Lenders use your FICO score and credit reports to determine if they’ll lend to you at all, which type of mortgage to use, and what interest rate to offer you.

If your credit score is 760 or higher, you should qualify for the best interest rates on a mortgage. The minimum credit score to get a mortgage is around 620.

While Kyle and I have never tried to hack our credit scores, you can probably tell from what I told you in the previous section that they are very good by now. I started taking out student loans at age 18 and got my first credit card at 22, so my credit history is quite long in the tooth. Kyle’s parents actually added him to one of their credit cards as an authorized user when he was a teenager, so that gave his credit score a big boost right out of the gate. Of course being debt-free at this stage while still using credit cards raises our scores quite a lot. We also haven’t applied for any new credit cards since the pandemic started, so there were no recent hard pulls on our credit reports when we applied for our mortgage. I don’t actually monitor my credit score, but Kyle keeps tabs on his through Credit Karma, and it’s been consistently over 800 for several years.

5. Down payment and closing costs

Saving up money for a down payment on a house and the closing costs on the purchase was the biggest, longest, and most intentional process we went through in preparing to buy a home. I will tell you all about it in detail after going over what this money is for and how much you should target.

First, the down payment.

The minimum down payment on a home depends on the type of mortgage you’re taking out. A conventional mortgage can require as little as 3% down, though 5% is more common as the minimum. A Federal Housing Administration or FHA loan requires 3.5% down. United States Department of Agriculture or USDA and US Department of Veteran’s Affairs or VA loans don’t have a down payment requirement.

You may be familiar with the recommendation to, if possible, put 20% down on a home. If you put down 20% on a conventional or FHA loan, you’ll avoid paying private mortgage insurance, which is an insurance premium you pay to insure your lender against the possibility of you defaulting on the loan.

The more you put down, of course, the smaller your mortgage will be. A larger down payment amount can also potentially lower the interest rate on your mortgage and make you a more competitive buyer in a seller’s market, as we have in 2021.

Second, the closing costs.

Going into the home-buying process, I had heard that sellers typically pay closing costs, but that’s not a hard-and-fast rule and it’s not all closing costs. While in a typical transaction sellers pay roughly 5 to 8% of the purchase price in closing costs, buyers pay roughly 3 to 5%. So if you were targeting a down payment size of 3 to 5%, you may want to double your savings goal to account for closing costs.

I’ll give you a history of our down payment savings over the years. But first, I want to share a memory that I have from 2012. Kyle and I were at our five-year college reunion and chatting with a friend who lived in southern California. This friend shared that she and her husband wanted to buy a home and that they were working on saving up a $100,000 down payment. A ONE HUNDRED THOUSAND DOLLAR DOWN PAYMENT. That to me was a completely unrelatable goal. She may as well have said a trillion dollars. It was totally unattainable in my world. Now, to be fair, my friend and her husband were both engineer types and I’m sure had very good salaries. And of course real estate is very expensive where they live. One hundred thousand dollars may have been a 20% down payment, or maybe not. But since I was a grad student living in Durham at the time, my mind absolutely boggled at that number.

The irony is that, nine years later, Kyle and I put down well over $100,000 on our house purchase. And I will tell you how we got there. Before I do, please recall from the beginning of the episode that I am acutely aware of the privilege that you will soon see at play in this process and that I am simply telling you what happened for us, not suggesting that you will or could take the same path.

Kyle and I opened a savings account that we nicknamed “House Down Payment” in 2014, the year that we defended. Our main financial priority prior to that point was retirement investing. By the end of grad school, we had eked our retirement savings rate up to about 17% of our gross income. We were also quite focused on budgeting and saving for irregular expenses; I shared our system for managing those in Season 7 Episode 15. Just before Kyle defended, our combined net worth had crossed $100,000, which I talk about in depth in Season 1 Episode 1.

That summer, as a defense gift, one of our sets of parents gave us $14,000. That was an incredible amount of money to us—about a quarter of our yearly household income—and completely unexpected. We decided to sequester it in the aforementioned House Down Payment account so that we wouldn’t be tempted to use it for everyday living expenses. Then, in summer 2015, that same set of parents gave us another $14,000 as a graduation gift. That also went straight into the savings account. So by the time we moved to Seattle, we had quite a nice nest egg earmarked for a future house purchase.

Once Kyle started his job at the Seattle biotech company in 2015, we reevaluated our financial goals. We increased our retirement savings rate to 20% of our gross income and have maintained it there since. The house down payment became our secondary saving goal. We figured we could move it to primary savings goal status when we had a firm timeline on buying by decreasing our retirement savings rate to perhaps 10% for a year or two. I’ll also note that we didn’t have a firm target amount of money for the down payment. We thought it would be good to have at least a 10% down payment, though 20% was likely out of reach, but of course we didn’t know yet how expensive of a house we would purchase.

I’ll give you snapshots of how the balance in that account grew or didn’t grow over the next five years.

In 2015, we consolidated some other savings we had into the account, but didn’t actively work on adding any more money to it. We got pregnant with our first child that fall, so we were instead beefing up our emergency fund and saving cash to supplement our income during Kyle’s parental leave. The balance in the account at the end of 2015 was $29k.

In 2016, after the birth of our first child, we committed to contributing a certain percentage of my irregular at that time income to the account, which amounted to tens of or a couple of hundred dollars per month. The balance in the account at the end of 2016 was $31k.

We continued that savings plan into 2017, and I even started paying myself a regular salary from the business. When we got pregnant with our second child that fall, we switched our savings goal as we did for our first pregnancy and temporarily stopped contributing to the account. The balance in the account at the end of 2017 was $40k.

In 2018, our insurance changed halfway through our second pregnancy. We were responsible for more medical bills associated with the birth of our second child than we had with our first, plus we supplemented our income during Kyle’s parental leave again. We returned to our savings plan after the birth of our second child, but then decided to pull money back out of the account for some of the medical bills and other irregular expenses. The balance in the account at the end of 2018 was $39k.

Through 2019, we continued to save a certain percentage of my income into the account, and we layered in an additional fixed $250 per month. Again, around tax time we contributed to the account a portion of a distribution from my business and our self-tax refund, which amounted to approximately $10,000. (Sidebar: We save a generous amount from each of my paychecks into a separate savings account earmarked for income and self-employment tax. We pay quarterly estimated tax and also more along with our tax return. Our self-tax refund is whatever is left over in our savings account after all the taxes are paid, which we then incorporate into the rest of our finances.) The balance in the account at the end of 2019 was $56k.

2020, as you all know, started out normally. We again were saving a couple of hundred dollars each month, plus a bolus around tax time. Then, the pandemic hit. We stopped paying for childcare, which was certainly a strain on our time and stress levels, but did allow us to increase our monthly savings rate to the down payment fund to $1,500. We also put most of the first stimulus check into the account.

I’m sure everyone has struggled during the pandemic in at least one facet of life. Our primary struggle was as the working parents of very small children. Both of our children’s preschools and our babysitting service closed. We had no nearby family, and all our nearby friends were dealing with their own small children. I’m sure you’ve heard that “it takes a village” to raise children. Well, the village was gone—or only on Zoom, at any rate. We definitely had it easier than many because of the flexibility in my schedule, but that only goes so far.

By the summer, when we acknowledged this was not just a flash in the pan, we realized that nothing was actually keeping us in Seattle. Kyle negotiated for permanent remote work with his employer, and we started preparing to move to southern California. Our Plan A was to rent a single family house in one of the cities in San Diego County that we were considering buying in so that we could get to know the area. As our desired move date grew closer, we were having some difficulty arranging for a rental at a distance, and we decided to exercise Plan B, which was to move in with Kyle’s parents in the Los Angeles area. They had extended us an open-ended invitation to stay with them.

That’s how, in August 2020, we moved back in with our parents, kids in tow. And even though it wasn’t what we thought we wanted, it was exactly what we needed. I’ve been calling these last eight months a time of respite. We were so tired and so stressed. Moving in with Kyle’s parents has benefited us in so many dimensions. They have provided part-time childcare throughout this period, which relieved so much of the time pressure we were experiencing. Kyle and I could leave the house together without the kids, which was incredible, especially once we started house hunting in earnest. Our kids had two more people they got to interact with on a daily basis.

On the financial side, Kyle’s parents refused any payment for living expenses, not rent, not utilities. Our only financial contribution to the household was to take over the majority of the grocery spending. Therefore, starting in September 2020, we increased our monthly savings rate into our down payment savings account to $4-5k. The balance in the account at the end of 2020 was $115k.

That saving rate continued at the start of 2021. We also put the second and third rounds of stimulus that we received into the account. When our respective sets of parents saw that we actually started house hunting, they also gave us a combined total of $86k. That a lot lot lot of money. We were not expecting or counting on those gifts at all. We are obviously really grateful to our parents for passing those on to us. The addition of those gifts put us well over the 20% down payment plus closing costs target, and we even have enough left over to do some needed repairs and upgrades to the property we bought. We’ll get into that momentarily.

Before we move on from this section, I want to point out some advice or observations:

1) I think it was psychologically important to us that we had a named savings account open for our down payment. Having a certain place to house money for any particular goal keeps it front of mind and prevents you from mixing money intended for that goal with your other money.

2) It was a good step to have a set savings rate going into that account on a monthly basis, when we did, and also to know that we would put any financial windfalls, like our self-tax refund, into that account.

3) Living rent-free with family members is an very, powerful financial move if it’s agreeable among all parties. We wouldn’t have done it if not for the pandemic, but I’m really grateful that we had the opportunity.

4) If you suspect your family might be planning to gift you money for your down payment, I suggest trying to find a way to get that conversation started earlier rather than later. You can tell from our tally that over half of our down payment fund was sourced from gifts, most of which we didn’t know about until the eleventh hour. We could have done more optimal financial planning if we had known they were going to arrive. Then again, it does feel good that we had some skin in the game.

5) Speaking of optimal financial planning, I’m not thrilled that we had cash sitting around since 2014 waiting for us to buy a house when in hindsight it could have been invested. Throughout this whole period, we sort of continually thought that buying a home was about two years off. For a two-year time horizon, cash makes the most sense. But that two years was actually up to seven years in our case. I am glad that we maintained our 20% retirement savings rate, because at least that money benefitted from the incredible market returns in recent years.

So my suggestion is to not skimp out on your retirement savings unless you have a really firm timeline on when you’ll buy. You might even invest part of your down payment fund if you are confident that you have time to weather any market downturns. We knew that we would be able to remove our contributions to our Roth IRAs and even some of the earnings if we really wanted to use them for a home purchase, so that helped us feel comfortable with a relatively high retirement savings rate.

You can see why I said at the beginning that this is a descriptive rather than prescriptive tale, right? Generating down payment money by receiving gifts from family, putting away thousands of dollars sent by the federal government for aid, moving in with your parents, and forgoing childcare is not exactly replicable.

6) Someone Willing to Sell You a Home

This last section is the story of how we bought a house in 2021, the strongest nationwide seller’s market in recent memory.

Once we moved to CA in August 2020, we saved a few searches on real estate websites that pull from the Multiple Listings Service and started passively figuring out in what areas of North San Diego County we could buy a single family home in our price range. We narrowed down our search to about 5 cities/areas. We also compiled a short list of must-have and nice-to-have features of our future home and property. That fall, we worked on making sure that the financial items I talked about earlier in the episode were all in order.

I read Home Buying for Dummies that fall to put together a game plan for getting a real estate agent and lender and so forth. Because at that time we thought we might need my income to qualify for a mortgage of the size we wanted, we agreed to file our 2020 tax return ASAP in January 2021 so that we could give that to our lender. In December and January, we also started contacting local real estate agents with the plan to interview several before choosing one.

That plan went completely out the window when we saw a property pop up in our search in mid-January. By that time, we were primarily using Redfin because we liked its search functionality best. So we saw this property come up in our search that met everything on our list and was well below the maximum of our price range. During the pandemic in California, there are no open houses, and you need a real estate agent to book a private appointment to see anything. We didn’t have an agent yet. Redfin, however, anticipates this exact situation, and so has a feature where you can request to see any property and you’ll be assigned a Redfin agent to go with you. So we did that. We also got a quick prequalification letter from the mortgage arm of our bank, Ally, for the amount we would need.

I’ll spare you the blow-by-blow, but we did end up putting in an offer on that house. The home’s list price was $675,000. Our offer was for $726,000. It sold for $746,000.

It’s very, very involved to decide whether you want to buy a particular house and put together an offer, especially a first offer, so we were working closely with the Redfin agent through that process. Ultimately, we decided that we liked working with her and she was doing a good job, and that’s how she became our agent. So that aspect of Redfin’s business model totally worked on us.

I want to take a small sidebar here about Redfin and why we liked working with one of their agents. Since we didn’t work with any agents outside of Redfin, these perks may exist elsewhere, too, so I’m not saying they are exclusive. 1) Redfin’s search engine is really nice to work with, definitely our favorite, and their app is good, too. 2) It’s seamless to view a property on the website or app and communicate with either your co-buyer or your agent. 3) Redfin takes a smaller-than-standard commission on the buy side, and the difference is refunded to the buyer at closing. 4) Our Redfin agent was on salary, so she got paid whether we bought a particular house or not. We didn’t like the commission-based compensation model of traditional real estate agents because it misaligns the incentives of the agent and buyer, so we felt much more comfortable with Redfin’s salary model. 5) If our agent was ever unavailable to tour a home with us, Redfin assigned another agent to sub in. So we never missed out on seeing a home because of our agent’s schedule.

So our first offer wasn’t accepted. But what we learned from that offer is the power of the appraisal contingency waiver in this market.

There are several contingencies in place in a standard home purchase offer that are in effect once the offer has been accepted and the house goes under contract. A contingency is a way for the buyer to back out of the deal if the contingency is not fulfilled. If you’ve talked with people going through the home-buying process before, you’ve probably heard about the inspection contingency. Once you go under contract on a house, there will be an inspection that will probably turn up a bunch of things wrong with the house. This is a chance for renegotiation, such as asking the seller to make certain repairs or give the buyer money at closing to make the repairs. If that negotiation does not go the way the buyer wants it to, the buyer can exercise the inspection contingency and get out of the contract without penalty, or even do so without negotiating. There are numerous contingencies that are standard for a contract, including the inspection, financing, and appraisal.

So that’s how contingencies work once you’re under contract. When you make an offer, in a strong seller’s market it’s common to waive as many of the contingencies as the buyer is able to and comfortable with. In our case, we could not waive the financing contingency because we were using a mortgage to buy the home. We would not waive the inspection contingency, and the market wasn’t quite strong enough to make that a common tactic. One of the reasons we lost out on that first offer was that we did not waive the appraisal contingency, whereas the winning offer did.

So what is the appraisal contingency? The buyer and seller agree on a price for the home, and during the contract period the home is appraised, which means that it is assessed by a professional and assigned a value that it could be sold for. In a not super hot market, this value is typically at or above the agreed-upon sales price, and everyone is happy. In a rapidly rising market, like we’ve seen this year, it’s typical for the agreed-upon sales price to be above the appraisal. That becomes a problem if you’re using financing, because the bank will usually not lend you more than its assigned fraction of the appraisal value.

To use round numbers, let’s say that you go under contract on a home for $220,000. You were planning to put down 20%, which is $44,000. But the appraisal comes back at $200,000. Your lender is going to say, nope, we are going to lend you 80% of $200,000, which is $160,000, not 80% of $220,000. Your choices at that point are to 1) get another appraisal that you hope comes back higher, 2) bring to the table $60,000 in cash to make up for the appraisal shortfall, 3) decide to redistribute your cash to fully cover the appraisal shortfall and instead put down less than 20%, or 4) exercise your appraisal contingency to get out of the contract if the seller doesn’t renegotiate the purchase price.

Now, it is apparently possible in some cases for the lender to give the buyer the go-ahead to waive the appraisal contingency with the agreement that the lender will still put up their agreed-upon percentage of the sale price, no matter how high the price goes. Our lender did not agree to that.

In our experience in the San Diego housing market in 2021, appraisal waivers are commonly used, and when multiple offers are in play, it’s likely that the seller will pick one that has this particular waiver. We didn’t use an appraisal waiver in that first offer, but we did in our second and third offers.

Speaking as a layperson and first-time homebuyer, waiving the appraisal contingency really scared me. Not only am I coming to the table with my 20% down payment plus closing costs, but now I have to potentially bring even more cash to the table just to make the deal go through, and that cash is above and beyond what an unbiased professional thinks the home is worth. And there’s no real upper limit to how much cash you could be asked to bring because you won’t know for sure what the house appraises for until you’re under contract. Suddenly the cash that we had saved and been given that far exceeded our projected 20% down payment seemed like it might not be enough.

Our agent and lender reassured me that even if we waived the appraisal contingency, we could still get out of any contract that we go into on the financing contingency. Apparently they are somewhat redundant. If the appraisal comes in lower than we expected and we didn’t want the house any longer, we could ask our lender to say they won’t lend to us the needed amount and use the financing contingency to cancel the deal. Of course, nobody wants a deal to be canceled in this way, so Kyle and I had to decide for each of our subsequent offers where we used an appraisal contingency waiver how much of an appraisal shortfall we were willing to make up with cash and consequently how low the appraisal would have to come in for us to exercise the financing contingency.

The second house we put in an offer on was listed at $769,000. Our offer, assuming the escalation clause was exercised, was for $860,000. That house received 21 offers, and the seller’s agent counted with 7 of the them, including us. He asked for certain changes to everyone’s contracts and to submit our highest and best offer, no more escalation clauses. We stuck with $860,000. The house sold for $861,000. It turns out that the winning buyer agreed to “beat any other offer,” and retained a tacit escalation clause following the counterofferr. That one was a heartbreaker.

The third house we put in an offer on was listed at $675,000. Our offer was for $746,000 with an escalation clause up to $756,000. The winning offer was all cash for $730,000.

At that point, we were totally emotionally exhausted. We had toured 13 homes and made 3 offers. Each one was completely wrenching for us. Quick decision making is not our strong suit, but it is necessary in a fast-moving market. Typically homes would be listed between Tuesday and Friday. We would tour them on Saturday, usually, and then have to submit an offer by Sunday or Monday. Each tour day involved at least 90 minutes of driving each way between LA and SD plus more driving to each of the homes. Every week and weekend were consumed with this process, and we were getting tired.

Remember that list of must-haves and nice-to-haves from before we started the search process? It had about tripled in length by that point. Touring houses and making decisions about whether or not to make offers really helped us clarify what we were looking for. We were able to become much more specific about our search parameters and could better decide based on a listing whether it was worth it to tour a home. We had also increased the top end of our price range by about $150,000.

On our last weekend of touring, we saw six houses on Saturday! Even though we had gotten a lot more specific about what we wanted, those six all made the cut. We noticed while we were out that there were way fewer buyers around than there had been on other weekends. Usually, we would show up for a 15- or 30-minute appointment and there would be someone finishing up their appointment just as ours was starting or would be waiting for ours to finish, often both. Sometimes, houses would be 100% booked for showings. However, that weekend, we had several appointments where no one was seeing the house immediately before or after us. It was a very noticeable aberration.

That was a very long day and very long weekend. After seeing the six homes, we only immediately ruled out one, so we debated putting in an offer on any of the other five. We slowly whittled down the list until we had just one remaining, but we simply didn’t feel strongly enough about it to put in an offer. We were very disappointed that we weren’t seizing our opportunity to make an offer on the low-volume weekend, but we just couldn’t do it by the end of the day on Sunday.

All day on Monday, we wondered if we had made a mistake by not making an offer on that last-to-be-ruled-out house in particular. On Tuesday, when the houses that went under contract over the weekend change their status to ‘pending,’ we saw that house’s status changed to ‘back on the market.’ We immediately contacted our agent, who told us that she had spoken with the listing agent and that the house had not received any offers. We knew this was our second chance and we moved fast. We put in an offer for below list price that day. We didn’t waive any contingencies because we knew we we weren’t competing with any other buyers. The sellers countered for asking price, and we went under contract for $700,000.

Kyle and I have speculated about why we got this house for asking price, which the house also appraised for, when virtually all the other ones we were interested sold for so far above asking and appraisal. I know we got lucky, but maybe our luck could be strategy for someone else. The following are some pieces of maybe advice for a hot market.

1) We stayed in and kept pounding the pavement. Even though we were tired, we didn’t take a break, we just refined our process.

2) Because we were out there just about every weekend, we recognized that weird low-volume weekend as an outlier and our chance to win a bid with less competition than usual.

3) We overlooked our house’s poor showing. I honestly think the listing agent made a major strategic blunder by listing when she did, which we benefitted from. The house was renter-occupied when it was listed, which meant 1) it was only shown for four hours total that weekend and 2) the house was not empty or staged, but rather cluttered with the renters’ possessions. The garage and living room were all but inaccessible due to the volume of stuff crammed into them. The windows were covered with a thick tinting film, so the house appeared very dark. It had a strong smell from the renters’ cooking. Finally, there was a necessary and obvious repair that had been neglected by the owner. The house apparently did not make a good first impression on the limited number of people who were able to see it that weekend, which resulted in there being no offers until we changed our minds. If the agent had waited to list until the renters had moved out, which they did a couple of weeks later, I think the sellers would have had a completely different result. On our end, none of the items that I just listed were the reasons we initially passed on the house. We really were able to overlook those cosmetic issues and focus on the fundamental attributes of the house.

The next month, between going under contract and closing on the house, is not something I hear people talk about as much as the first stage. It’s not as thrilling as house hunting, but a lot more work get done. I definitely developed a new appreciation for our agent. There is a lot of communication, negotiation, and paperwork, and we were really glad to have a professional guiding the process as well as support from numerous other professionals. On our side, we almost pulled out of the deal like three more times as new information came to light, but we ultimately decided to stick with it, and we now officially own that house.

My advice for you on finding someone willing to sell you a house is:

1) Start early figuring out where you want to live. Research your market thoroughly months or years in advance of when you actually want to start house hunting. You can do this through tracking prices, visiting the various target areas, and talking with people who live there. Ideally, you would actually live there for a while before buying. We wish we had been able to do this.

2) In non-pandemic times, I suggest going to a lot of open houses. I think we would have really benefitted from a period of casually seeing houses in person to expand and refine our list of must-haves and nice-to-haves. For example, a big difference for us between simply visiting someone’s home and evaluating whether or not we wanted to buy it is that in the latter case we brought a range finder to measure distances and calculate square footages. We developed opinions on how large a bedroom or a dining area or a backyard should be for our home that we didn’t have prior to starting house hunting.

3) Interview real estate agents. I am happy with the agent we worked with, but I’m not happy about how we sort of defaulted into working with her. And do consider Redfin. We had a great experience with the company.

4) Shop around for a loan, again well in advance of when you make your first offer. On our agent’s suggestion, we worked with a local mortgage broker, which was a great experience. But we also got our own quotes from several lenders and even one other broker to make sure we were getting the best rate. A piece of advice I got from Sam Hogan was to ask each potential lender for the official loan estimate. Quotes can take on any format, so a potential lender might be able to make theirs look more attractive by omitting or shifting around some of their fees. Loan estimates have a consistent formatting across the industry, so it’s actually possible to compare them directly.

5) Once you’re ready to submit offers, as I said earlier, pound the pavement consistently because you never know when conditions will align for you to get an offer accepted, like in our case.

6) Trust your agent, or rather find an agent that you can trust. Our agent was not super directive in telling us how much we should bid on a particular house, but she did provide us with information and market insights and to help us make the decisions. She helped us respond to shifting market conditions, like starting to use the appraisal contingency waiver.

Conclusion

We’ve come to the end of the episode! I hope this gave you some insight into what it takes to buy a home, particularly in a HCOL area in a strong seller’s market. Please know, however, that it is often possible to buy a home without all of the advantages that we had. Our financial profile is quite strong at this point because of our age, post-PhD incomes, and the gifts we received, but if you don’t have those things going for you, you may still be able to buy a home. Of course, that depends a whole lot on where you’re trying to buy. In fact, buying a home at an early age could put you in an even stronger financial position by your mid-30s than we are in, especially if you house hack or force appreciation in your home.

Best of luck to you in your home-buying journey! Sam Hogan and I will be answering any question you have about being a first-time homebuyer as a grad student or PhD this coming Thursday, May 6, 2021. Register for the call at PFforPhDs.com/mortgage/. Please join us!

Learn from This Professor’s Nightmarish Home Ownership Journey

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In this episode, Emily interviews Dr. Kevin Jennings, a professor of Criminal Justice and Criminology at Georgia Southern University in Savannah, Georgia. Kevin and his wife bought a home in Savannah shortly after he started his position, and the house has proven to be a money pit. Kevin catalogues all that has gone wrong with the house, what he wishes he would have known as a first-time home buyer, and the lessons he’s learned the hard way. He also gives excellent insight into the academic job market for someone already on the tenure track and how his status as a homeowner has affected his career prospects.

Links Mentioned in the Episode

Further Resources

Teaser

00:00 Kevin: The one thing I might’ve done differently is look for a house with fewer of these incidental costs, right? So if I wasn’t so close to the water, I wouldn’t have to do the flood insurance. If I wasn’t outside the city limits, I wouldn’t have to pay for the extra fire and protection stuff like that. I wish I would have known about those things in order to judge where to buy and which house to buy.

Intro

00:31 Emily: Welcome to the Personal Finance for PhDs podcast, a higher education in personal finance. I’m your host, Dr. Emily Roberts. This is season six, episode seven, and today my guest is Dr. Kevin Jennings, a professor of Criminal Justice and Criminology at Georgia Southern University in Savannah, Georgia. Kevin and his wife bought a home in Savannah shortly after he started his position. And the house has proven to be a money pit. Kevin catalogs all that has gone wrong with the house, what he wishes he would have known as a first-time home buyer, and the lessons he’s learned the hard way. You won’t want to miss Kevin’s insight into how his choice to purchase this home has affected his mindset toward his academic career. Without further ado, here’s my interview with Dr. Kevin Jennings.

Will You Please Introduce Yourself Further?

01:23 Emily: I have joining me on the podcast today Dr. Kevin Jennings, and he is going to talk to us about, well, a bit of a money pit that he is currently invested in. So, we’re going to hear tons more about that. Kevin, will you please introduce yourself to the audience?

01:37 Kevin: Yeah. Hi, I’m Dr. Kevin Jennings. I’m from Austin, Texas, and I went to Texas State University–Go Bobcats! Meow–and got a PhD in Criminal Justice in 2014. I was then hired at Armstrong State University in Savannah, Georgia, and I moved there immediately after graduating for a tenure track job, which I realize how lucky I am to land a tenure track job just out of getting my PhD. And I mostly focus on cyber crime and digital forensics. So I do a lot of work with law enforcement, but also work with computer science people and tech people to kind of find evidence on digital storage devices.

02:27 Emily: What an exciting topic. We’ll hear more about that at the end of the episode, where people can learn more. So, you moved to Savannah for this position. You said that was four years ago. Is that right?

02:40 Kevin: Five years ago.

Homeownership Journey

02:41 Emily: Five years ago. Okay. And you decided when you moved there shortly after that you were going to buy a home. Can you tell us more about how you did that shortly out of graduate school and why?

02:54 Kevin: So, we moved here in 2014 and rented a house. Unfortunately, in 2015, my grandfather passed away and he was the last of my four grandparents. And he left my parents and his three siblings a fairly decent amount of money. And my parents decided to share some of that with me and my sister. So, we got this decent size chunk of money. It wasn’t a huge amount, but it was enough for a down payment on a house. And my wife and I, having so recently started our actual career jobs, feeling like we were more adulty than we really were, decided to use that as a down payment on a house. So, we shopped around the city of Savannah. We, we were leaning towards finding either a fixer-upper that we could get for cheap and put money into, or kind of a duplex or house that had something we could rent out.

04:00 Kevin: Our real estate agent showed us this house in the neighborhood we were currently living in, which is great, less than 10 minutes from campus, really nice houses. And it was neither of those things, but we both fell in love with it. It’s kind of a two and a half story, four bedroom, two bath, huge backyard, and where the backyard ends, there’s a tidal creek right behind it. It’s just swamp and woods. And it was just beautiful. And we just kind of both fell in love with it. So, even though it wasn’t what we were looking for, we decided that this was the house we really wanted.

Making the Down Payment

04:40 Emily: And with that down payment money you were able to do the purchase?

04:44 Kevin: We were able to afford the down payment, which was I believe 10% of the total purchase cost, which was listed at $160,000. And we were super, super good negotiators and talked them down to 159. So, we put, again, I want to say it was 10% down. And we got this house and we were so excited, but we sat through kind of the lecture from the bank on, “Here’s your mortgage payment and here’s what that’s going to consist of.” And we were really shocked at how little of our actual mortgage payment goes into the principal amount of the loan. I mean, so I have my latest house bill here and my monthly payment is $1,142. Of that $1,142, $233 goes to the principal, which, I mean, that’s what, 20% maybe? So, we were kind of shocked by that. And we were looking at the other kind of things that, that had to go and pay for.

Expected vs. Unexpected Costs

06:05 Kevin: And there was the stuff we were expecting, obviously interest is going to be a big deal. The interest on ours is $460 a month. So, we knew that was going to be a big deal. Taxes, of course we expected. Coming from Texas, the taxes were actually slightly lower than we thought they were going to be. Because Georgia has an income tax rather than relying on property taxes the way Texas does. But then the other things that got added in there are the stuff that really kind of shocked us. First off, because we had that beautiful tidal creek in our backyard, we were required to get flood insurance, which most homeowners insurance doesn’t cover floods. And since Savannah is a low-lying coastal city, plus we’re right up against that tidal creek, we were required by law to get flood insurance. The other thing we didn’t expect was private mortgage insurance. It’s like $200 a month for this private mortgage insurance, essentially because we’re first-time homeowners. And that will go away when we’ve paid the mortgage down to 80% of the level of the value of the house. But since we only put 10% down, getting from 90% of the value to 80% of the value is going to take years.

07:31 Kevin: And we’ve been paying for four years and we’re still, I don’t want to say nowhere close, but not nearly as close as we’d like to be to that 80% level that will allow us to take away that private mortgage insurance. So, that’s $200 a month we’re paying for essentially not having enough money. So, just all those things combined to create a mortgage payment that we really kind of weren’t expecting. Homeowners insurance, flood insurance, private mortgage insurance, all that stuff really adds so much to the monthly fee, which really hurts in the long run.

Mortgage Structure

08:11 Emily: Yeah. I just want to jump in and make a couple of comments for the listener in case they’re not that familiar with the structure of mortgages. You mentioned a couple shocking figures, like the amount of your monthly payment that actually goes towards principal is 200 some dollars. Whereas the amount that goes towards interest is 400 some, and people may not realize this, but mortgages are on an amortization schedule where the great majority of your payment in the first year goes towards interest. Very little goes towards principal. And that shifts over the course of the loan. So, in year 30, if it’s a 30 year mortgage, you’re paying a vast majority towards principal and very little towards interest and ultimately pay off the loan. So, it’s really like when you start over with new mortgages, maybe every five years or something if you move, that amortization schedule, you’re kind of always playing around in the paying mostly interest, very little in principal, part of the amortization schedule.

09:02 Emily: And that’s why it is so difficult, like in your case, to get from 10% equity up to 20%, so you can remove that private mortgage insurance. Because mostly what you’re paying, as you said, is towards interest. Plus, all these other things you had to add onto the mortgage. So, it’s really kind of, you know, people talk about the differences between the advantages of renting versus buying. But the thing is that in your case, and many others, when you have so much of your monthly mortgage payment that goes towards anything other than the principal, that’s almost like paying rent. It’s just money that’s out the door every single month that’s not really building your own net worth, your own equity in the house. It’s just stuff that has to go out the door to keep you in that house. And so I wanted to know, when you were sitting through this explanation from your bank–which actually it’s kind of cool that they gave you the explanation, honestly, like they were doing a little bit there to help educate you–how far along in the process were you, and were you ready to like run out the door or was that no longer an option?

Mortgage: A Little Extra Goes a Long Way

09:59 Kevin: It was no longer an option. But I was so ecstatic over finally owning a home that it didn’t quite hit me, what exactly it meant until I had made a couple of payments. The other thing was, it wasn’t until I think a year after we bought the house, my wife decided to go back to school. So, she helped put me through grad school. And then a year after I graduated and moved here and got this job, she decided to go back to school to become a nurse. Because what she did before, there’s really no job market for here in this part of the country. So, while she was still kind of working a semi-decent job before she went back to school, we were paying extra towards the principal every month, which I had been told was a very, very good idea. Because anything extra you can put in, especially at the beginning of a mortgage, really knocks down the long-term cost of the mortgage.

11:17 Kevin: So, we were able to put an extra, I can’t remember exactly how much, extra 50 or $60 a month towards the mortgage for the first year, maybe two years, that we were in the house. With her back in school, we really had to tighten our belts. We were not able to do that, but now she’s graduated. Just started her new job yesterday, in fact, and I’m really excited to be able to kind of go back to doing that. Putting even just a little bit extra towards that mortgage, I think, will help a lot.

Unforeseen Costs of Home Improvement

11:50 Emily: Yeah. Like you said, you get a lot of bang for your buck when you start paying down that mortgage at the beginning a little bit faster, at least until the point where you can get rid of PMI. I mean, that’s like a really big goal when you have a mortgage. To not be paying insurance on the behalf of the bank to insure against you, to not have to pay that makes a huge difference. Yeah. So, at least to get to that point. That would be amazing. So, you know, I mentioned earlier that your house has kind of turned into a little bit of a money pit, right? So, it’s not only the structure of the mortgage payment that you were learning as you got into the house, that, “Hey, not that much of this money is actually going towards principal.” But in fact, you’ve incurred a lot of other expenses that you did not really realize or factor in when you first got into the house. So, can you outline what those are, please?

12:38 Kevin: Absolutely. So, we were buying this house and we realized we wanted to do a bunch of stuff to it. So, right off the bat, as soon as we bought it, we knew we wanted to take out all the carpet because we hate carpet. And we wanted to replace a lot of the lighting fixtures because the house was built in kind of the mid-nineties. And it had those kind of classic, like little glass globe, things that were super cheap and in every house back then. So, we knew we wanted to replace those. We knew we wanted to paint a bunch of stuff. And that was when my wife and I kind of both realized that we don’t have those skills. We were both very nerdy in high school and college and we never got those, those kind of woodworking and electrician and, you know, I can barely use a screwdriver.

What You Pay is What You Get

13:29 Kevin: So, those skills are something that I really wish I would have had before I decided to buy a house. So, we rip out the carpet, and two big problems presented themselves. One, there were places where the floor was uneven and the carpet kind of hid that. But two, the stairs that we had hoped to just kind of refinish, were just kind of ugly two by fours that they had nailed down. So for the floors, we hired someone to come in and put in some vinyl flooring, which was, I was shocked at how much vinyl flooring costs. But you know, it’s still cheaper than hardwood. The stairs we replaced ourselves and the flooring was not installed properly. We just kind of found somebody on Craigslist or something and brought them in. And that was a really bad idea.

14:34 Kevin: If you’re going to hire someone to come in and work on your house, don’t go for the kind of cheap fly by night operation. Definitely, definitely try to find someone you trust or a company that has, you know, you can go on Yelp and find their reviews. Stuff like that. Then there were little expenses, like we had to replace the mailbox paint, because we wanted to paint a bunch of stuff. But yeah, when we first moved into the house, those were kind of these big expenses that we kind of sort of planned for. We had saved some money to the side that we weren’t putting into the down payment just for those improvements. But we went, I don’t want to say wildly over budget, but fairly over budget on that process.

Hurricanes and Fences and Air (Conditioning) – Oh, My!

15:30 Emily: So, you’re saying there were certain things that when you bought the house, you knew, okay, you hate carpets, you’re going to tear all those out. There were certain things that were obvious upon purchase you knew you were going to take care of, and you had prepared to some degree to do that with savings. What’s next? Were there other things that have come up in the years since then?

15:49 Kevin: So, we are in a coastal city and when we moved here we were told, “Don’t worry about hurricanes. Hurricanes never hit Savannah because we’re kind of tucked into the coast.” And then of course, since we’ve moved into the house, we’ve had two hurricanes. So, our fence, when we first moved in–and for a long time we had dogs. We are, are now dogless, unfortunately, rest in peace–but one of the reasons we liked this house is because it had a fence and a big area for the dogs to play in. But one of the hurricanes that came through kind of finished it off and knocked it down, or at least a large section of it down. So, we got our entire fence replaced which was thousands of dollars we weren’t planning on spending.

16:40 Kevin: And even though we had essentially hurricane insurance, the deductible on that is like almost $5,000, I want to say. So, it really wasn’t financially viable to use the insurance to fix that fence issue. The second problem is that the upper half of the second floor was an add-on. When they originally built the house, it was just the first floor and the main part of the second floor, the upper part was all attic space. The second owners of the house finished out that attic space and turned it into a fourth bedroom. What we didn’t know when we bought the house, and what the home inspection didn’t show, is that when they finished out that area, they had to move the indoor air conditioning unit. When they did that, instead of redoing the drain line, the way they should have, they just ran a new line from where it used to be to where it is now.

AC Repair Fiasco

17:50 Kevin: So, essentially, the drain line for the air conditioner goes from one part of the house, across the house to where the air conditioner used to be, down under the flooring of the attic, then back across the house to where the air conditioner is now to actually drain out of the house. We had no idea that had been done that way. So, we had all these problems with the air conditioner. Finally, we call in a good repair company and they come in and take a look at it. And they’re like, yeah, the drain lines are all bad. But also this air conditioner system is designed and built for a house of the old size. With the addition, you’ve added so many square feet that you really should move up, and it’s getting towards the end of its like 20-year life or whatever it was anyway.

18:45 Kevin: So, if we’re going to do all this work, it’d be a lot better in the long run to just replace the entire system. So, we said, “Okay.” So, we got a new indoor unit, a new outdoor unit. Ended up needing to rerun all of the ducts because when they had done the addition, they had messed up the duct work, new thermostats, whole nine yards. I think we spent $13,000 on essentially a $15,000 system. Then it started having problems and wouldn’t work. And we spent the next year replacing parts and getting service. And finally, finally, after a year they just replaced a huge chunk of the outdoor unit, all these things, but it took them a year in the South Georgia heat with no air conditioning before they finally figured out kind of what was wrong and how it was messing up. But essentially, we ended up with, as part of the replacements, they gave us improvements. So, essentially we got a $17,000 air conditioning system for $13,000. But that’s still $13,000 we hadn’t budgeted for, we hadn’t planned on. So, I think we got a six-year loan, interest-free, luckily, and that’s $230, $240 a month that we weren’t planning on. Which, right when my wife was in the middle of nursing school, was a very difficult financial burden to kind of take on unexpectedly.

20:31 Emily: Yeah. I was just going to ask how you actually did pay for that. I’m thinking about your mortgage payment and that whole system costs about what a year of housing cost for you. That’s I mean, a huge expense. So, glad to hear that you got some decent financing, it’s not going to cost you any extra in interest, but what a saga. And especially to live for a year without proper air conditioning, as you were describing. Are those the big things that you’ve had to lay out for the house?

21:00 Kevin: Those are kind of the big things.

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21:05 Emily: Emily here for a brief interlude. I bet you and your peers are hungry for financial information right now, especially if it’s tailored for your unique PhD experience. I offer seminars, webinars, and workshops on personal finance for early-career PhDs that can be billed as professional development or personal wellness programming. My events cover a wide range of personal finance topics, or take a deep dive into the financial topics that matter most to PhDs, like taxes, investing, career transitions, and frugality. If you’re interested in having me speak to your group or recommending me to a potential host, you can find more information and ways to contact me at pfforphds.com/speaking. We can absolutely find a way to get this great content to you and your peers, even while social distancing. Now, back to our interview.

Rule of Thumb for Annual Home Expenses

22:03 Emily: There’s a rule of thumb–and you might laugh at this, but maybe you’ve heard it before–there’s a rule of thumb that you should expect to spend on average on your home 1% of the value of the house per year. So, like average 1% of the value of the house per year on home maintenance repairs and so forth. Sounds like you probably have blown that out of the water every year you’ve lived there, right?

22:25 Kevin: Yeah. Oh yeah. So, the downside is we now have our garage doors, we have two garage doors, that need to be replaced because it’s Savannah, Georgia. Everything is wet here, constantly. I mean, it’s just moisture, moisture, moisture. It’s ridiculous. So, our garage doors are rotting out and we need to replace those. Our deck, for similar reasons. It’s not bad, but we’re anticipating that we’re going to need to replace it in the next couple of years. So, there’s more thousands of dollars of stuff that we’re kind of dreading and preparing for. The other things that have really shocked me are things like–we’re technically outside of the city limits, right? So, we have to pay for fire and EMS services directly. Instead of it being paid for through our city or County taxes, we have to pay, I want to say, it’s just under $300 a year to the fire and EMS service to come out. We have to pay for termite inspection yearly, or termite service yearly, which is hundreds of dollars a year. So, all these things have really combined. We didn’t think about it. Going from an apartment to a house you expect, you know, okay, rent, mortgage. There are going to be taxes and interest and principal. But then it seems like there are all these other fees and taxes and payments for things that you would never expect, having spent your entire life, or at least entire adult life, in apartments and renting places. It’s incredible.

Lessons Learned: Do It Right the First Time, Due Diligence

24:29 Emily: Yeah. I think a couple of the lessons that I’m hearing from this, that maybe the listener can apply. Two things. One is do the work right the first time.

24:38 Kevin: Yes.

24:39 Emily: Invest in quality from the beginning, and hopefully you won’t have problems or the replacement costs or whatever won’t come up so soon. Part of that was decisions that you’ve made, part of that was the previous homeowners’ decisions, but pay for it to be done right the first time. And the second one is–maybe, I don’t know, it sounds like you did what any reasonable person would do in terms of buying the home in that you lived in that neighborhood for a year prior to buying and you think you know where everything is, you know where are the schools, whatever you’re considering in your home-buying purchase. Just by living nearby, you’ve learned a lot of those things. But it sounds like you didn’t investigate–and why would you have?–the fact that these services were being billed directly instead of through the tax system, or all these other line items. Or, you know, maybe if you’d understood more about flood insurance, you would’ve told your real estate agent, “No, I’m not interested in anything next to a creek or whatever.”

25:37 Emily: I mean, those are not things you’re going to naturally pick up just by living somewhere. You’re learning this the very hard way. And so, I’m really pleased to be able to share your story with the listeners. Just say like, there are probably going to be more expensive than you think there will be. So, just plan for the unexpected, right? And prepare for that. But maybe do a little bit more due diligence to try to figure out what the peculiarities are of this city that you’re choosing to buy in. Like you were saying, well, people told you hurricanes never hit Savannah. Turns out, at least for the recent years, that hasn’t been the case. But I don’t know, I think you did what any reasonable person would do, so I’m not criticizing you. But I’m just really glad to hear this for anyone else who’s coming up on a home-buying purchase to do a little bit more to figure out what all these little nuanced expenses are going to be.

Do Not Skimp on Home Inspection

26:24 Kevin: Absolutely. The other thing I want to point out is home inspections. Do not skimp on the home inspection. We had a fairly decent one, but they missed a lot of these things where if they’d have been just a little bit more paying attention, a little bit more thorough, we would have known about these things in the contract negotiation process, not a year or two years or three years later. So, do not skimp out on the home inspection.

26:57 Emily: Yeah, definitely. So, I live in Seattle, so in the market here, at least in recent years, it’s been a sellers market, right? And a lot of people, as part of the bid that they enter, they waive inspections. It’s just something that no one wants to hold up the process, but even if you have to go that route based on what’s standard in the market, still do the inspection. Even if you don’t have it as part of the contingency or whatever, still do it so you know all these things upfront, like you were saying.

How Does Being an Academic Affect Homeownership?

27:28 Emily: So, I’m curious about how your position as a faculty member, as an academic, has played into these homeownership decisions or your ability to handle these things, I guess. So, it sounds like you got this tenure track position. Despite a little bit of upheaval with your university, you’ve maintained that and you bought a home where you got your tenure track position, probably what anyone would try to do, if possible soon after. So, yeah. How does being an academic affect this whole homeownership situation?

28:03 Kevin: When I was in grad school, I kind of bought into the belief that if you can find a really nice, good tenure track job you can stay at that university for a long time. Decades, if not your entire career. At the university I went to and the department I was in, there were a lot of professors that had been there for 20, 30 years. So, I was kind of expecting that kind of experience. So, when I moved here and was ready to buy the house, I was very much in this mindset of, “My family will be at this university working here for a long, long, long time.” So, in the University system of Georgia, you have an option between a pension system or a 401k.

29:01 Kevin: And if you’re going to be there longer than 10 years, the pension system is really the better option. So, that’s what I chose because I thought, “Oh, I’ll be here at least 10 years, no big deal. I’ll buy a house. I’ll be here at least the five or six years that it takes to really get enough equity in a home to make a profit when moving.” But I’ve come to kind of find out and realize that job-hopping and transferring positions is almost, or just as important in academia, as it is in private industry. Growing up in Austin, there were a lot of tech people. And tech people were all talking about, “Oh, you’ve got to move jobs every five years or every however many years.” And I thought academia was kind of exempt from that. And it comes to find out, it really isn’t. It’s depressing when you’ve been working at the same university for four or five years and they make new hires, straight out of grad school, hired at well more than you’re making. So, I wish I was able to move or at least have the possibility of moving. I wouldn’t necessarily want to leave. I love my job. I like living here. I like the university I’m at, but being so tied financially, through both the house and the pension, to this one job in this one place is something that even if I am going to stay here for the next 10 or 20 years, it’s still distressing. And it makes me feel like I don’t have options. It makes me feel like I’m stuck. Even if I want to be here, that’s still kind of a bad feeling, you know?

The Golden Handcuffs

30:55 Emily: Yeah. I definitely understand that. You know, sometimes people refer to the benefits or something that a job gives you as golden handcuffs. So, it’s like you feel, you feel tied to your job because you don’t want to lose the great compensation or the benefits, whatever. The pension is a little bit like that for you, but the house is on the other side of that. That’s not so much golden handcuffs as it is kind of an anchor. Until you get this equity up to a certain point, it’s going to be very–I mean, it’s not impossible–but you may take a loss, you may have to bring money to the table. Something, if you were to try to move without having a lot of years under your belt, paying this mortgage and getting the equity up there.

Would You Have Done Anything Differently?

31:36 Emily: So, I definitely understand what you’re saying. And I think it’s really great insight for other people who are looking to enter the job market that we think a lot of times as getting that tenure track position as like, “I’ve made it, this is it. That’s all I needed to do, and I’m going to be set for the rest of my career because I landed that one position.” And what you’re saying is, “Hey, that’s good for the first few years, but don’t think that you’re never going to apply for another job to advance in the way you want to.” That you might not have to move around, as you said, like what happens in the private sector. So, I’m really glad for that insight as well. And just, I don’t know, would you have done anything differently? I mean, knowing this. Now that you know this about your job and your feelings about it, would you still have purchased the house? Because it still kind of seems like the thing to do, right?

32:26 Kevin: Yeah, it does. It depends on what the alternative is. If the alternative was, you know, renting, I don’t think I would have. The one thing I might’ve done differently is look for a house with fewer of these incidental costs, right? So, if I wasn’t so close to the water, I wouldn’t have to do the flood insurance. If I wasn’t outside the city limits, I wouldn’t have to pay for the extra fire and protection stuff like that. I wish I would have known about those things in order to judge where to buy and which house to buy. Right? Does that make sense? So, it’s not that I regret buying a house. It’s that I regret not understanding exactly what the cost of buying this particular house are.

Best Advice for Another Early-Career PhD

33:13 Emily: Right, right. Yeah. Thanks for your insight into that. So, two questions as we wrap up here. The first is what is your best piece of advice for another early-career PhD? It could be related to the conversation we’ve been having, could be something else. What is that?

33:28 Kevin: Start putting money away as fast as you can. Start saving. It can be a 401k, it can be putting extra money towards just a stock trading account. Also, speaking of stock trading accounts, I found the Fidelity, I think it’s a bank, but it has a stock trading app thing. And they have a credit card where you get 2% cash back from every purchase that goes straight into the stock trading account. So, I put all my purchases on that and pay it off in full every month. So, I never pay a dime in interest, but I still get 2% into this longterm savings account. And then once I build up enough money from that I can purchase a stock or an exchange-traded fund or something like that. And then I never touch that. That’s all just socked away money. That’s essentially free money. As long as you’re paying off that card every month, that’s essentially free money. So, definitely do something like that. It can be a travel card that gives you miles on an airline. But make sure it’s paid off in full every month.

Where Can People Find You?

34:50 Emily: And second question, last one here, is where can people find you?

34:55 Kevin: So, I’m on Twitter with the username @CyberCrimeDoc, and I’m on YouTube with the channel name, Arresting Developments. And I actually do have a group I just started not too long ago called Americans for Election Reform. It’s a big political focused on elections and election security and making sure all Americans vote and all votes count. And that is on Facebook and Twitter.

35:29 Emily: All right. Well, thank you so much for joining me today, Kevin, and for telling us this very easy to learn from story.

35:35 Kevin: Absolutely. Thank you so much having me. I really appreciate it.

Outtro

35:38 Emily: Listeners, thank you for joining me for this episode. Pfforphds.com/podcast is the hub for the Personal Finance for PhDs podcast. There, you can find links to all the episode show notes and a form to volunteer to be interviewed. I’d love for you to check it out and get more involved. If you’ve been enjoying the podcast, please consider joining my mailing list for my behind-the-scenes commentary about each episode. Register at pfforphds.com/subscribe. See you in the next episode! And remember, you don’t have to have a PhD to succeed with personal finance, but it helps. The music is Stages of Awakening by Podington Bear from the free music archive and is shared under CC by NC. Podcast editing and show notes creation by Meryem Ok.

This Grad Student Defrayed His Housing Costs By Renting Rooms to His Peers

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On today’s episode, Emily interviews Dr. Matt Hotze, an administrative director at Rice University and co-host of the Helium podcast. When Matt moved to Durham, NC for his PhD, he immediately purchased a 3-bedroom house and rented the two extra rooms to his labmates. The rent Matt collected from his two housemates covered nearly all of his mortgage payments during his years in grad school, though he had some financial bumps in the road as well relating to house repairs and his dual relationship with his housemates. Ultimately, his decision to sell the property also hinged on his personal relationship with his tenants. Matt shares the overall effect this investment had on his finances and his three key pieces of advice for another early-career PhD considering this route.

Links Mentioned in the Show

PhD landlord

Would You Please Tell Us More About Yourself?

Matt has a PhD in environmental engineering. His advisor moved from Rice University to Duke University near the start of his PhD. He purchased a home in Durham when he moved there in 2005. After he finished his PhD in 2008, he did a postdoc in France and then another postdoc at Carnegie Mellon. Subsequently, he had a career in publishing with the American Chemical Society, serving as the managing editor for four journals, where he learned the business side of science. Currently, he works at an engineering research center at Rice with 80% of his time, and the other 20% of his time is dedicated to the Helium Podcast.

How Were You Able to Purchase a Home During Grad School?

It is no mean feat to buy a home during grad school!

Further reading: Purchasing a Home as a Graduate Student with Fellowship Income

First, Matt was “blessed” to not have any debt from undergraduate degree.

Second, when he started grad school in Houston, lived with his parents for most of his first year and banked much of the stipend. Living with his parents in the suburbs was cheaper because the distance from home to campus impeded going out and spending on entertainment. His motivation to save money was due to his upbringing; since he was able to save, why not do so? He expected there to be some use for it eventually, though he didn’t have specific plans to buy a home when he started. Saving the money wasn’t a big sacrifice as living with his parents was comfortable.

Third, in 2005-2006 the houses in Durham were not that expensive. This was after the dot com bubble burst in early 2000s and the housing crisis hadn’t hit yet. Matt hadn’t necessarily planned to buy, but he saw that the nice, recently built apartments were rather expensive to rent.

Though Matt had enough money for a 20% down payment, he still needed his parents to co-sign his mortgage because his income alone wasn’t sufficient to support the mortgage payments. He bought a modest 3BR home and rented out the other two bedrooms for below market rate. The purchase price for the home was approximately $200,000.

Further listening: How to Qualify for a Mortgage as a Graduate Student or PhD, Even with Non-W-2 Fellowship Income

Matt bought the house even before he moved to Durham, so he never rented there. He felt he was on a time clock to own the home for long enough during his PhD to make the transaction costs worthwhile. He decided he would either buy right when he arrived in Durham or he wouldn’t do it at all.

Emily had a similar thought process a few years into grad school when it might have been possible to buy, but since she was already a couple years into grad school she decided against buying due to the time clock.

Matt’s first tenants in Durham were the other grad students in his lab also moving with his advisor, which also influenced his decision to purchase right away.

What Were the Pros of Renting Out Rooms to Peers?

1) Matt had almost zero housing expenses as the rents from the two bedrooms basically covered the mortgage each month.

2) Matt’s house became the gathering spot for his grad school friends, so instead of spending money going out they would drink beer and play board games at home. (Emily had a similarly inexpensive social experience in grad school.)

3) Didn’t have any issues with the great majority of his tenants.

What Were the Cons of Renting Out Rooms to Peers?

1) Once Matt moved on from his PhD, he didn’t know his tenants quite as well. One of his tenants asked to pay his rent late a couple times. It wasn’t possible to handle this completely professionally because of the social ties between him and his tenants. This did end up working out, but it was stressful to handle this, especially from afar. Matt was especially concerned about being fair to all his tenants but not establishing a precedent that it’s OK to pay the rent late. The rental agreement between Matt and his tenants was helpful in this case, not only the legal components but also to set expectations.

2) The home inspector didn’t catch some flashing around the chimney, so a water leak developed soon after the purchase. Matt used some additional cash he had on reserve (~$500) for this repair, so it was a good thing he hadn’t used all his cash on the purchase. Another time, the water heater exploded. Thankfully replacing it didn’t cause an issue because Matt already had cash built up for these kinds of repairs. Emily references the 1% rule: You can expect to pay 1% of the home’s value in maintenance/repairs each year – but that’s only an average! It can be much higher or lower in any given year.

Why Didn’t You Sell When You Left Durham?

When Matt left Durham for his postdoc in France, it was not a difficult decision to keep the property. He still had tenants in place who would take a couple more years to finish their PhDs, and with three rooms rented out the property was now earning money above expenses. One of Matt’s friend-tenants served as the property manager so he didn’t have to hire a professional company.

At the end of grad school, Matt had a good amount of savings built up, and after the postdoc he had even more saved. This really set him up to be financially successful in subsequent stages of life. He lived in Pittsburgh for his second postdoc. When Matt married his wife and combined their finances, he was able to significantly contribute to their nest egg. It was great to not have to worry about (non-mortgage) debt.

All of this financial success came from the germ of financial parental help during college and that first year of grad school. Good financial fortune and bad financial fortune early in life do not guarantee any particular financial outcome, but certainly put momentum behind your finances one way or another.

How Did You Decide When to Sell the House?

When his friends finished their PhDs at Duke, Matt no longer felt able to hold on to the property. He didn’t have the bandwidth at the time while working in an intense postdoc position and applying for faculty positions to figure out how to hire a property management company from afar. Deciding to sell was really a trust issue. If he didn’t trust his tenants through personal relationships, he didn’t want to be a landlord any longer. It’s not always about numbers, sometimes it’s more about your feelings!

Matt ended up selling in 2009, which was pretty bad timing with respect to the national economy. He sold the house for just about the same price that he bought it for. Even without the property appreciating, the financial benefits he experienced through those years made it a good financial decision. Even though he didn’t make any money on the house, he defrayed all his housing costs when he lived there and continued to make money afterwards.

What Advice Would You Give to a Grad Student or Postdoc Who Is Considering Buying a Home and Renting Out Rooms?

1) Use a calculator to figure out whether buying and renting out rooms in a home makes sense financially in terms of the costs you will incur and the rental prices.

2) Are you OK having uncomfortable conversations with your tenants? Someone will inevitably not pay rent or break something or something stupid in the house. This will happen whether you know the renters or not!

3) Are you comfortable making basic repairs on your own? It’s expensive to outsource it all the time! Are you able to talk with vendors and negotiate? This is a needed skill.

4) What’s your gut feeling on owning rather than renting? You’ll make a good decision!

What Is the Helium Podcast?

Christine and Matt co-host the Helium Pocast. They help early-career researchers – senior grad students to early faculty – navigate the transition from grad school into first faculty position, from landing the position to navigating the position to advancing within the position. They bring on interviewees to talk about career transitions. Check them out! New episodes come out every Tuesday.

Purchasing a Home as a Graduate Student with Fellowship Income

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In this episode, Emily interviews Jonathan Sun, a second-year PhD student at Yale University. Jonathan purchased a house in New Haven after his first year in graduate school. He shares the process he used to search for and ultimately go under contract on a home, including applying for various incentive programs. But his home ownership goal was nearly derailed; his original mortgage lender pulled out because his fellowship income isn’t reported on a W-2, and he had to scramble to find another lender at the last second.

Links mentioned in episode

homeowner grad student

0:00 Introduction

1:02 Please Introduce Yourself

Jonathan Sun is a second year PhD student in Pathology at Yale University in New Haven, Connecticut. His stipend is $35,000 and it increases annually. When he moved to New Haven, he started by renting a two bedroom, one bathroom apartment with his girlfriend. He was paying about $1,500 monthly for rent.

3:10 What made you think that it would be a good idea to buy a home as a graduate student?

When he began his PhD program, Jonathan had in mind that he would want to buy a home. He thought between his first and second year would be the ideal time to buy. At this point in his PhD, he would know if he would be staying there for five or six years. Emily mentions that it’s a good idea to learn about the neighborhoods before buying a house. Jonathan agrees that it was a good idea to get to know the city and neighborhoods. He shares that if he had bought a home when he first moved to New Haven, he would have chosen a less convenient or less desirable neighborhood.

Further reading: Should I Buy a Home During Grad School?

5:11 Was your interest in buying a home specific to New Haven or anywhere you moved to for your PhD?

The idea of buying a home occurred to Jonathan when he was interviewing at Johns Hopkins. He saw that homes were affordable near Johns Hopkins. He realized that homes could be affordable even on a graduate stipend. When he chose to attend Yale, he did some housing market research on New Haven and saw he could afford homes there.

When Jonathan was interviewing for PhD positions, he met a current graduate student at Johns Hopkins who owned their house. He didn’t meet any graduate student at Yale who bought a home. Jonathan says owning a home as a graduate student is not that common in New Haven. Emily shares that when she was a PhD student at Duke University, it was fairly common for grad students to own home.

7:20 How did you prepare your finances in the months leading up to buying a home?

Jonathan worked on improving his credit. He says that good credit is definitely important. To get a mortgage at a decent rate, or even to get a mortgage at all, he had to have good credit. Jonathan also searched for incentive programs around New Haven. He says he saved about $10,000 with incentive programs. He shares that while Yale University offered incentive programs for employees, he could not qualify for them as a PhD student. He relied on incentive programs instead of savings because he was paying expensive rent in New Haven.

To research incentive programs, Jonathan talked to a real estate agent who pointed him to incentive programs. Shortly after Jonathan arrived in New Haven, he started working with an agent. Jonathan didn’t have connections to an agent when he started to process. He simply dropped into a real estate office and met an agent there.

9:54 What were the steps you went through to buy a home?

Jonathan started looking for houses with agents about three months after he moved to New Haven. He didn’t start seriously looking until six months after his move. He says that even if you don’t have intention to buy right away, it is important to familiarize yourself with the neighborhoods. He was looking at four different neighborhoods around Yale University. He got an idea of price range for homes and who are the neighbors. This process gave him a firm idea of whether he wanted to rent or buy. Most of the time, he looked at houses through private showings with his agent. He went to just a few open houses without his agent.

During Christmas break, Jonathan thought carefully about whether he should pursue buying a home or not. He talked to his friends and family, and it seemed like the right thing to do. He asked his family if they could help with his downpayent, and made sure to have open communication with his family.

Buying a home took at least two months of seriously looking. Jonathan went through some experiences of making an offer but not getting the house. He recalls three homes that he made an offer for, and there were some other situations where he almost made an offer. He didn’t want to settle for a house that he wasn’t satisfied with. However, his offers were outbid or made too late, and this added to the challenge of buying a home. Emily shares that in Seattle, she hears stories about bidding wars and people struggling to get the house they want, then they end up settling for a home that wasn’t all that they wanted.

13:54 How did you balance the process of buying a home with your first year of graduate work?

After his offers on homes were rejected multiple times, Jonathan felt demoralized. He had lowered his standards for a home. But then when he was browsing an online resource, he found a house that looked perfect. This house ended up being the one he bought. He says it was challenging to balance his graduate work with buying a home, but he was glad he did this in his first year rather than in his second year. He shares the example that on the day that he gave his offer, he was giving a presentation on a paper. He barely read the paper because he was so tired, but he still managed to give a compelling presentation. Right after he finished the presentation, he ran off to give an offer on the house. Much of the stressful part of home buying is waiting to get a response on the offer.

16:01 Tell us about the house that you ultimately purchased and live in now.

Jonathan was browsing online on the day before his presentation. He noticed the house was ten minutes away from where he was living. The house had just gone on the market that day. He pushed his agent to get a showing the very next morning. He got to meet the owner and exchanged contact information directly. The owner was a Masters student, and they had a connection. About two hours after the tour of the house, Jonathan gave an offer of $2,000 over the asking price. This was right after his presentation. He asked to receive a response in one day. The next day, someone else made an offer of $5,000 over the asking price with full cash. Jonathan raised the offer to $2,000 over the other offer. Jonathan’s offer was accepted, and he says that meeting the owner in person helped him get the house.

19:06 How was the process of getting a mortgage?

Jonathan didn’t have his mortgage ready until after his offer was accepted. He did have a pre-approval, but this didn’t work out for him. The lenders didn’t understand his financial situation as a graduate student with a stipend. The pre-approval came from a lender with connections to multiple banks. When you make an offer on a house, it is important for the seller to know that you can afford the house. For a pre-approval, the lender does a very brief credit check on you. The pre-approval shows that you can take out a loan of a certain amount. The pre-approval shows the seller that you can take out a loan for the house. Pre-approvals are very superficial, since they do not ask for a W-2. The lender asks for monthly income and proof that you reliably pay rent.

After his offer was accepted, Jonathan first explored incentive programs. He found an incentive program that stipulated if he stayed at least five years in New Haven, the program would pay at least $2,000 per year and contribute to the downpayment. The application for the incentive program took a while. Jonathan says that ideally the application should be done before submitting an offer. The seller wanted to move out three months after the sale, so this gave Jonathan the right amount of time to sort out the finances.

Jonathan qualified for two incentive programs, but he was happy to get just one because the programs were slow to respond. The incentive programs have a list of lenders that you have to use for a loan. The lenders were local banks in Connecticut. Everything seemed like it would work. He submitted all his documents, but about three weeks before closing, he got a phone call saying that they couldn’t pre-approve of his mortgage because the university wouldn’t be able to provide W-2. The university wouldn’t submit a form indicating that his stipend is guaranteed for 3 or 4 years.

Emily explains that there are different types of pay for graduate students. The W-2 is provided for assistantships and this represents a more typical employment situation. Jonathan says he doesn’t know the name of his pay. He gets the 1098-T, and he simply calls his pay a graduate stipend. Emily says that the 1098-T usually means you are funded through an award or outside fellowship. Lenders get confused by fellowship income. Jonathan says his acceptance letter from Yale says his stipend is guaranteed for several years, but the lender wanted the university to sign a form. The university was unwilling to compromise on signing that form that indicated the stipend is guaranteed. Emily says this “guarantee” of income is strange, because even with a W-2, the typical job is not guaranteed for multiple years.

28:15 How did you resolve the problems with the lender?

Jonathan was calling Yale’s financial office daily. He asked for help from the Dean. He started looking at the other banks on the incentive program’s list, because he had a feeling it wouldn’t work with this bank. There were a few banks around the university, so he went in person to the bank. He talked to a mortgage broker in person. They sat down together, and Jonathan filled out the form during the meeting with the mortgage broker at the new bank near the university. Jonathan resolved the situation because he found someone who was willing to work with him through his unique financial situation.

Jonathan said that this bank offered their own portfolio mortgage with their own requirements. It was harder to qualify for, but it came with a lower interest rates. He had little debt and good credit so he could qualify. It was a different type of mortgage than the first lender offered.

Jonathan was really caught of guard by the phone call from the first lender. It seemed fine, then suddenly he got the call, with no easy way to resolve the issue. Closing got delayed from Friday to Monday, but the closing went very smoothly with the new lender.

32:29 How does it feel to be a homeowner and to be a graduate student?

Jonathan says it feels good to come back to his own house. He can rent out some of the rooms. If he rents out two bedrooms of the three bedroom house, he can cover a good chunk of monthly mortgage. He says this is a great financial decision for him. The mortgage is less than what he paid in rent, plus he has the potential to rent out rooms. Two months after he moved in, he started renting out the rooms. He has two tenants and they are covering good fraction of mortgage payment.

Jonathan has to stay in the house for at least five years. He says that in five years, he will definitely be in a better financial situation from buying instead of renting. He bought in a very good location, in the up and coming neighborhood near Yale. He thinks the market value of the home will increase.

35:25 Have you thought about what you will do when you finish your program?

Jonathan says he has two different options after he finishes his PhD. First, if there’s a good market value to sell the home, he can sell it. Second, the location near Yale University will make it very easy to continue to rent the rooms in the house. He doesn’t see himself working in New Haven after his PhD unless it’s for an academic position.

36:24 Final Comments

Jonathan shares that he had a huge budget for his move, but he didn’t spend very much. He estimates he spent less than $1,000 to move into the house. He moved during the summer, so everyone was getting rid of furniture for free. He used his Toyota Corolla to pick up furniture, and hardly spent any money to furnish the house. He is replacing pieces over time as he saves money. He recommends overestimating expenses for a move.

38:44 BONUS INTERVIEW with Sam Hogan, mortgage industry professional.

Emily chats with her brother, Sam Hogan, who works in the mortgage industry. She asks him about solutions for graduate students and postdocs who are receiving fellowship income but want to buy a house.

Further listening: How to Qualify for a Mortgage as a Graduate Student or PhD, Even with Non-W-2 Fellowship Income

Sam Hogan is based out of Northern Virginia. He works for PrimeLending (Note: Sam now works at Movement Mortgage) and he is licensed in all 50 states. He explains what lenders look for in the risk profile. They are looking for the ability to repay, and to see verification of history of the type of employment as well as the likelihood of employment to continue. Sam says that ten years ago, anyone could get a no document loan. This meant anyone could verbally verify their finances, but this practice led to many foreclosures. Now, lenders require written verification of employment.

Sam explains that in Jonathan’s case, the lenders sent a form for verification of employment to the university. On the form, there is a tiny check box that asks if employment is likely to continue. It is a yes/no checkbox. Universities won’t check this box because technically a PhD candidate could discontinue their PhD by going into the workforce or transferring institutions.

Sam shares that the best approach is to document likelihood of continuation of income. This may be in the fellowship offer letter. Conventional loans look for at least three years of guaranteed income. When it comes to approving loans, it is all about the presentation of the buyer. Sam says to work with someone goal-oriented like yourself, who will be able to over-document your income. For example, you can write a letter about why you got the fellowship, and include that even after your PhD you will have income. This approach ensures you have good presentation to the underwriter. Loan approval comes down to one person’s decision, a human’s opinion. He says to work with underwriters who are flexible and will give you personalized attention.

Emily recommends that PhD students and postdocs work with Sam because he understands fellowship income situations. Sam can be contacted by cell phone at 540-478-5803. He can be emailed at [email protected]. His national licensing number is 1491786. He has a Zillow profile under Sam Hogan.

46:28 Conclusion