19YO Trying to Not Screw Up His Life

[Jack Martin]

My apologies for how long this post is, it's almost a full on financial advise session than a single question, just want to get some guidance as the main centerpiece to my situation is a house and renting.

Here's a  quick rundown on current my financial state. I am making about $23,000 a year, and currently have around $5000 in expenses annually. I could up my income considerably as I only work three days a week, so whether its delivering pizzas or DoorDash or some other second part time job, my income could be closer to $30,000+ if I really tried. I have a $130/month car payment, $200/month car insurance, and no other debts. My credit score is just about what most banks would consider Excellent, due to a $500-limit credit card I pay small expenses with and my previous and current car loans. I will be going to Aircraft Mechanic Technician training in August 2020, and the entire 2.5 years will cost $20,000 or less. Once certified, I should start out at about $85,000-100,000/year. I am working at a major airline so the already abundant jobs in this field will come even easier being in the system already. Plus with the abundant overtime, I could really increase that range as well.

Anyway, with that covered, here's the deal. I have been planning for a while to buy a 4 bedroom house in Minnesota come next spring or early summer. By then I will have $10,000 stashed in an emergency fund, and $12,500 to go towards a down payment with the rest going towards furniture and household supplies, and also to cushion the emergency fund. I have 3 reliable and very close friends that all want to move in and rent from me when I get the house. I'm well aware of how careful one must be when renting to friends, or renting at all, and believe me, I have been planning with experienced adults about legal safeguards and the best way to handle the situation so there is zero grey area.

Got a family friend who is a skilled realtor, just helped us get the house we're in now (I'm living with my parents while I'm saving money), and they sold our old house as well. Very good at what they do so I'm planning to probably go with them to help me buy.

For a decent 4 bedroom in the Twin Cities general area (I work at MSP Airport so I can't go too far), you're looking at the $200-275k range. It would be around 1500-1750 a month including PMI and other costs, so split between 3 renters, its around $600/month before utilities, which, at least in Minnesota, I think is more than reasonable.

I'm mostly concerned about these worst case scenarios:

a. I cannot qualify for the loan due to my laughable current income compared to what I want to buy. 

b. The mortgage broker might not accept future rent income as actual income to justify the loan.

c. Might lose job randomly due to some economic turmoil causing mass firings, I am low seniority and fairly expendable currently.

d. A friend might fall out with me unexpectedly and leave me 600+ short a month.

In summary, I can in NO way afford even a $200,000 house, unless it's a 4 bedroom with 3 rented out rooms bringing in money every month. At $1,500 a month, that is $18,000/year, so if I even got the loan, if all hell broke loose and all the renters flaked and I couldn't sell the house, things could very easily go spiraling into financial hell. Seems like an insane risk, but my family, who is extremely wary of getting into debt (wouldn't even let me borrow 10 bucks for a Bionicle set if I didn't have the money) seeded this idea, along with some other very level-headed and experienced family friends. My grandfather, who is a bit of a real estate tycoon, said that the biggest mistake I could make would be doing a 15 year mortgage and putting any more than the minimum down on the house, because in his words, this house is not an investment, it's a place to live. That especially struck me as genius because I never wanted this house to be a long term living situation or to raise kids in it or anything, just as a way to live with my friends and avoid dumping money into renting a place of my own. I'll probably move out of it after like 5 years anyway.

And just to be clear, I am an ALL-cash kind of guy, I plan to start investing in rental properties in a few years once I land the job I'm pursuing. Cash is totally the way to go and all future real estate purchases are going to be mostly or all cash. What's more, by the time I start school I should have about $5000 to put towards school, and since at that point I'd be living in my own house with renters paying the bill, I would have no mortgage payments to worry about, leaving my monthly expenses under $750. 

Immediately after buying the house I'd be going back to putting money away, and can easily pay off the school loan and even my car loan before I finish school in Jan 2023.

I know that this post was basically just an info dump but I really don't wanna screw up so early, as at my current trajectory I could retire early and wealthy.

[Tim Swierczek]

@Jack Martin  I applaude your planning and thought you are putting into your investing.  Since you asked for advice my recommendation would be to wait until your in a more stable position.  Once your schooling is done you would be able to withstand the ups and downs of the real estate market.  If you do move ahead then you will want a cosigner.  I can tell your eager to get going and but you should learn the difference between Loan Guidelines & Lender OVerlay's  See this article I wrote https://www.biggerpockets.com/forums/701/topics/667832-loan-guidelines-vs-overlay-s-the-differences-between-lenders

The reason this is imporant is that when your asking these questions you might be fooled into thinking that lenders will differe on the guidelines related to your questions, and they willl not that article explains why.  As for your questions the first two answers are guideline based (no opinion).  The second 2 are my opinions.  Please reach out if you'd like to meet up some time and talk investing.

My answers to your questions:

a. I cannot qualify for the loan due to my laughable current income compared to what I want to buy. – This is true your housing debt to income ratio exceeds all loan guidelines, you would need a cosigner to qualify. At $1500/month payment your housing ratio would be 78.26% and at $1700/month your housing ratio would be at 88.69%. It should be around 31% and I would not expect you to qualify above 39% based on the information provided.

b. The mortgage broker might not accept future rent income as actual income to justify the loan. -The mortgage broker CAN NOT accept boarder income. Fannie Mae guidelines do not allow the lender to use income from the unit you are living in unless you meet very specific boarder income rules that you do not meet based on your post.

https://www.fanniemae.com/content/guide/selling/b3/3.1/08.html

Ineligible Properties

Generally, rental income from the borrower’s principal residence (a one-unit principal residence or the unit the borrower occupies in a two- to four-unit property) or a second home cannot be used to qualify the borrower. However, Fannie Mae does allow certain exceptions to this policy for boarder income and properties with accessory units. See B3-3.1-09, Other Sources of Income, for boarder income requirements, and B5-6-03, HomeReady Mortgage Underwriting Methods and Requirements, for accessory unit income requirements.

https://www.fanniemae.com/content/guide/selling/b3/3.1/09.html#Boarder.20Income

Boarder Income

Income from boarders in the borrower’s principal residence or second home is not considered acceptable stable income with the exception of the following:

When a borrower with disabilities receives rental income from a live-in personal assistant, whether or not that individual is a relative of the borrower, the rental payments can be considered as acceptable stable income in an amount up to 30% of the total gross income that is used to qualify the borrower for the mortgage loan. Personal assistants typically are paid by Medicaid Waiver funds and include room and board, from which rental payments are made to the borrower.

The HomeReady mortgage eligibility requirements include an additional exception. See Chapter B5-6, HomeReady Mortgage.

The following table provides verification requirements for income from boarders.

✓	Verification of Income from Boarders
Obtain documentation of the boarder’s history of shared residency (such as a copy of a driver’s license, bills, bank statements, or W-2 forms) that shows the boarder’s address as being the same as the borrower’s address.
Obtain documentation of the boarder’s rental payments for the most recent 12 months.

c. Might lose job randomly due to some economic turmoil causing mass firings, I am low seniority and fairly expendable currently. – this is a valid concern when you are on the edge and cannot afford the payment without rent.

d. A friend might fall out with me unexpectedly and leave me 600+ short a month. – Another valid concern.