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The risks of buying with no money down

Chris Farrell May 1, 2012

Question: I recently was accepted to grad school, and my wife and I will be moving from Michigan to New Mexico. We are having a debate as to whether we should buy a home. We each have student loan debt and do not have any money for a down payment. We are looking at some properties near the school I will be attending that cost between $50,000 and $60,000. With my wife also looking at advancing her education, we think we may be in New Mexico for 2-4 years.

After I finish my degree, I would like the freedom to leave New Mexico, if necessary, without having to worry about selling a home. My wife doesn’t like the idea of paying rent and getting nothing back from it. Also, depending on the length of our mortgage, our monthly payments will be lower than most places where we would pay rent. We both have good credit but are unfamiliar with taking out a mortgage for a home. Would you advise purchasing a home based on the market? We know it is a good time to buy, but I remain skeptical. Any and all advice would be much appreciated. Love the program! Sam, Grand Rapids, MI 

Answer: I have all kinds of warning bells going off for me, even if the housing market continues to improve over the next several years. My own feeling is that you’re piling on too many risks if you end up buying.

For one thing, you and your wife are investing in your educations, which is terrific. You won’t know what the return on investment will be until you both graduate and land jobs. For another, you already have student loan debts and you’ll probably add to them in the next 2 to 4 years. I worry that you don’t plan on staying in the area very long. You would have a hard time finding a mortgage lender with no money down.

The lesson of the housing boom and bust isn’t that home ownership is a mistake. Instead, we should all have a greater appreciation of the risks embedded in owning a home. Like any other asset — stocks, bonds, gold, you name it — home prices go down as well as up. Too much debt and too little equity is always a perilous investment. I think the risks of owning are too great if you can’t afford a substantial down payment and if you can’t live in the home for at least 5 years. 

I disagree with the notion that renting is the same as throwing away your money. The flexibility that comes from renting puts a limit on many downside risks. It’s smart to rent if your income is uncertain and your job prospects unclear. Renting is a savvy move for anyone who thinks they might pick up stakes in 5 years or fewer.  

It’s true that homeowners regularly add to their equity when they pay the monthly mortgage tab. But all a renter has to do is go online and tell the bank to automatically withdraw a sum of money every month from the checking account and put it in savings. It’s the same as building up equity every month and the money is more easily available to you if you move to another state after graduation. 

The lure of getting a deal on a home is strong. Now could be a great time to buy. In 4 years, you may look back and say, boy, we would have made a nice chunk of change if we had bought. Problem is, if housing keeps bouncing along bottom, maybe improving a bit, and you get good jobs offers elsewhere, you could be stuck. In the meantime, you’ve added a mortgage to your student loan debt burden. You’re investing in your education and that’s probably enough risk at this stage of your lives.

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