A Step-by-Step Guide for Students Planning to Buy a Home
Most students plan to buy a home before turning 25. It marks their wish list as they enter their dream university. Purchasing a home is indeed a huge milestone. It means achieving around 60% of your life goals. However, one goes a long way in rationalising the dream. Purchasing a home as a student implies multiple challenges. For example- if you lack sufficient income, you may need a guarantor on the mortgage. Additionally, ensuring the correct credit score is a must.
Learners may find home purchases challenging due to some aspects. However, taking a step at a time may help. For example, the first step is to search for the location and the property. What type of home do you want to buy? How much bigger should it be? It will help you define the approximate costs and mortgage rates. Accordingly, you can plan the deal. The blog discusses such aspects of buying a home as a student in the UK.
How can you purchase a home as a student?
Students face multiple expenses like- rent, utility bills, groceries, educational needs, etc. They could hardly save for short-term goals. Buying the home requires you to save for a mortgage deposit. Yes, every mortgage requires you to pay at least 10% of the home’s price as a deposit. Thus, check whether you can afford to save it within current circumstances. If not, read further:
1) Step -1- Determine an affordable amount and budget
Exploring the mortgage rates and identify your current savings. Students lacking a full-time income may struggle to afford a massive property. Thus, the budget can be explored by cutting costs, searching for prospects of increasing income, and reducing liabilities. Don’t forget the student loan. You must repay it, too. Accordingly, analyse the amount to afford. Check whether you may reduce the deposit requirements. Some lenders providing student mortgages may help you with that.
2) Step 2- Get a mortgage agreement in principle agreement
A mortgage agreement, in principle, helps understand the amount you can borrow. Doing so before purchasing the home is essential. It helps estimate and plan the expenses accordingly. The mortgage provider provides one to first-time homeowners. He analyses his current employment, credit score, and finances. Accordingly, he gives a budget estimate of the house. The agreement does not guarantee the mortgage cover. Instead, it just provides an idea of the amount to budget for.
- Step 3- Determine the credit score requirements
Every mortgage provider explores the credit history of the borrower. It lists the person’s expenses, debts, employment history and bankruptcies (if any). It is the report card that helps the lender analyse your affordability. Generally, there is no specific credit score to qualify for the mortgage. However, individuals with credit scores over 690 get affordable quotes.
Students generally lack a credit report or share a low history. It leads to instant loan rejection. Improve your credit score by:
- Having a personal bank account
- Taking up a credit builder loan
- Have telephone, rent, and utility bill payments in your name
- Reduce reliance on credit card
- Ensure a variety of debts to ensure a good credit mix.
- Pay bills timely
- Step 4- Limit debts and monitor spending
Limiting expenses is one of the best ways to climb a property ladder. Analyse your existing debts and settle them. You can begin from the costly ones to the low-cost liabilities. Students may struggle to pay it all with minimal savings.
Don’t worry, you can set up a debt management plan. However, it is ideal only if you have debts over 10 and cannot manage. Alternatively, consolidate or set budgets for payments. You can decide to pay separately or combine depending on the capability.
However, as a student, you find yourself in a financial dilemma. What if you must pay the examination fee now? Yes, you cannot delay such critical educational needs. Don’t worry, you don’t need to miss the exams. Instead, check and obtain small loans online with low-interest liabilities. Yes, individuals with a basic income may get one. However, settling some debts before may help fetch much better rates. You may get up to £3000 for your needs. It prevents you from affecting the budget for debt payments. Moreover, reducing debts improves credit and makes you credible in the provider’s eye.
- Step 5- Ensure a lengthy employment history (3 years)
Most mortgage providers require the borrower to have at least 3 years of consistent employment history. You may switch jobs, but there should not be a wide employment gap. Self-employed individuals struggle to qualify due to these stringent criteria. Postgraduate students should seek good job opportunities with better pay. Try to remain consistent within the job profile. If the atmosphere and pay are good, retain the job.
Don’t explore when you want to buy a home quickly. Moreover, don’t add liabilities as income grows. Instead, explore the best ways to save a high deposit. Improve your income according to the mortgage agreement in principle calculations. Having a flexible one is helpful while purchasing a home. This is because some unexpected or hidden costs may quickly add up.
6) Step 6- Start saving for the deposit
Ensuring a healthy employment history helps you save for critical mortgage requirements. Deposit accounts are one of the most essential costs. It is an upfront amount that you pay on the loan. Usually, no lender charges over 10% of the new property’s price as a deposit. This implies that if the property you want to buy costs £250,000, you will pay £25000 as a deposit.
Saving up that much as a student is challenging. Thus, prepare it at least 1-2 years before buying the home. You can open a different savings account to make a deposit. It will help you avoid consuming the money saved. Moreover, the interest may help it grow faster.
A deposit is an ideal option for individuals with bad credit. Providing a deposit higher than 10% helps you qualify. The higher the deposit, the lower the interest rates. Moreover, it reduces the final amount to pay on the loan.
7) Step 7- Put the existing property on sale
Yes, you may have an existing property that you may utilise for a better deal. It is if you struggle to qualify for a traditional mortgage. Yes, a student can have a spare property. You can have it under two conditions:
- You inherited it from your family
- You received it as a gift from your parents
In both conditions, you are the legal owner of the property. However, you may need to pay inheritance tax up to 40% of the property’s price. It is free if you don’t live up to 7 years from the property inheritance date. Alternatively, you must pay the tax.
However, you still own the property. You can use it to bridge the cost of the new property. Set it up for the sale. Analyse the best bridging loans and compare the costs. File up the bridging loan application by ensuring the documents are correct. It is the best way to buy a new property without selling the old property first. You may get a high Loan-to-value ratio or high sum against the property. The providers calculate the ratio by analysing the existing and future property values.
You can pay the loan dues from the old property’s sale with a bridging loan. Thus, it is an effective way to keep your cash safe. However, ensure that the property has no pending debts or legal matters against it.
8) Step 8- Complete the loan and get the keys
Whether you choose a traditional or bridging mortgage finance, pay the dues. You must make regular monthly payments on the loan. The mortgage is usually a commitment of up to 15-25 years. You can choose the term according to your financial comfort. You can also choose a mortgage agreement for up to just 10 years.
However, you must have a decent income and credit for that. Spread the payments and pay in equal instalments. However, try to settle the student loan alongside. It is if you have other life goals. Afterwards, you get the keys to your home as the legal owner. Plan moving costs, and you are done! Welcome to your home sweet home!!
Bottom line
Purchasing a home as a student is challenging. However, the above tips may help you plan finances and documents hassle-free. Always double-check the mortgage terms before consenting to it. Check the hidden fees and enquire about costs unknown. It helps you ensure transparent borrowing. Check the impact of skipping a payment and avoid it at all costs.
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