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Thanks for any input in advanced. We are not ready to purchase our first home, but are hopeful that we will be able to in the future. We will have BIG student loan debt, possibly 100K-140K (interest already included) for the household. How do we factor that into the equation when estimating how much we can afford to spend on a home?
~ I should note that some are unsubed loans and grad plus loans so they are not locked in at 6.8% interest rates ~
... Is this going to prevent us from being able to buy a home directly out of school ... should we reconsider a pricey graduate progam ... yikes ...
You need to account for the entire payment when thinking of what you can afford, even if they have been deferred. Also, if you do have deferred loans, I suggest getting a document from the lender that states what your payment is going to be, as it probably wont show up on your credit report and if it does, there have been many times where the payment wasn't accurate. Whatever you do, don't leave it up to the underwriters, they use a formula that often over-estimates how much your payment is going to be.
So is this to say that if we have a 100K student loan debt, but aside from that figure we can afford a 700K house, we should actually buy a 600K home?
Now if that same 100K debt was something other than a student loan, for example a credit card debt, would that negatively affect home loan eligibity? Is that what you mean when you say it would not show up on a credit report?
Yee-ouch. My husband and I also have a decent size chunk of student loan debt.
When you apply for a mortgage, one of the things they look at is your debt:income ration and debt:assets ratio. If you have a high income and a substantial amount of assets, the student loan debt might not be a problem at all. But if your income is low or if you don't have many assets, the mortgage company may advise you to pay down your debt and/or save up money before getting a mortgage.
I got a mortgage about 6 years ago (with my significant other at that time) and our assets just about equaled my student loan debt (which was our only debt). We were able to qualify.
I think what is important is that you consider what your payments may be in the future. A very general rule of thumb is that 25% of your monthly income should cover all your fixed expenses (mortgage payment, student loan payment, debt payment, car payment, etc.). You may qualify for a mortgage for a $700k home, but you also want to be able to afford to make good size payments on your student loans...unless you don't mind paying on them for the rest of your life.
Obviously, if you can find a way to go to graduate school without incurring more loans, it would be in your best interest. You'll end up with a higher salary. My husband went back to school 5 years ago for his second masters and he was so sick of accumulating student loans that he forced himself to only take 1-2 classes at a time and pay cash every semester. It was tough and it took longer, but he did it, and we're glad his debt didn't get any higher because of it.
Hey, thanks for your input! I have heard people talk about the 25% rule, but do people actually do that? lol. It seems that here, in the bay area, people are paying 50% of their income to morgage alone.
I am really kicking myself for not applying to more affordable grad programs, but due to our situation, it is just not an option right now.
If I estimate what our combined income will be when I finish the program and what our debt will be, and then I factor in the 25% rule ... well, that leaves us with no options to buy in the bay area ... just not possible.
Is it really a big mistake to pay half of your monthly income into a morgage if that is your priority and you can make it work?
Berkeley - An underwriter is the person who looks at your loan application, credit, etc. and makes a decision on whether or not you are approved. As for the student loan amount, it's not the amount you owe, but how much you will have to pay each month that really limits how much you can borrow for a home.
As for the old 25% rule, you can most likely go a little higher than that. Many people are in the 50% range...I'm not saying that's good, just how it is. You just need to sit down and think about how much you can really afford. If you do decide to buy a home, don't max your self out. If you qualify for $700K, then start looking at $600k homes. You'll thank yourself for it later.
Thanks. I see now. I always had this idea that student loans were better than other types of debt. ... debt is debt ... better to have none! Student loan companies seem to be flexible on how long you take to pay off your loan, but if you take 30 years to lower your monthly, you end up paying back a ridiculous amount of money.
Hey thanks though. I guess I should also be thinking about what we can do to boost our credit in the mean time. We have one significant credit card debt, maybe we should pay that off with student loan?
Where can I find info on how to raise a credit score? I know the basics--pay all bills on time, keep credit cards open but not with outstanding balances--but if there is extra things we can do in the mean time, it may be worth it.
Here are some other ways to improve your score. If you carry a credit card balance, never let it get above 50% of your credit limit. When you can, pay off your credit cards. If you have a credit card that you don't use, go charge a tank full of gas (or whatever). Then pay it off at the end of the month. Don't apply for a bunch of cards, you probably don't need them and in some cases they can do more harm to your score than good.
Thanks. I see now. I always had this idea that student loans were better than other types of debt. ... debt is debt ... better to have none! Student loan companies seem to be flexible on how long you take to pay off your loan, but if you take 30 years to lower your monthly, you end up paying back a ridiculous amount of money.
Hey thanks though. I guess I should also be thinking about what we can do to boost our credit in the mean time. We have one significant credit card debt, maybe we should pay that off with student loan?
Where can I find info on how to raise a credit score? I know the basics--pay all bills on time, keep credit cards open but not with outstanding balances--but if there is extra things we can do in the mean time, it may be worth it.
Thanks everyone!
Actually, for credit cards, it doesn't matter if you carry a balance or not. It's whether you pay your bills on time. Not to say that it's a good idea to carry a balance, but it doesn't really affect your credit rating as far as I know. Also, prior to taking out a mortgage, go a year or so without having any credit checks done (don't even open a new phone account or buy new car insurance). The more checks you have on your credit report in a given period of time can lower your credit rating.
Personally, I think going as high as 50% is a house of cards. I'd stay around 30% max. If you can't do that where you are, then move. There are plenty of metro areas in the country where housing vs. income is not so out of whack. You're going to hate it when you bring home $6000/month (hypothetically), and you pay $3000 for your housing expenses (mortgage, taxes, insurance, homeowners association if you have one, upkeep, utilities), $1000 - $1500 for your student loan payments, a car payment or two, and only have $1000 - 1500 left to live on for a month.
Anyway, this "Housing Opportunity Index" chart is from 2006, but it's still pretty relevant:
The lower on the list, the more "unaffordable" an area is compared to median incomes in that area. It's pretty self-explanatory, and California takes up the bottom 1/3 of the list.
It's quite shocking really. Let's compare San Francisco to Ann Arbor, MI (a pretty liberal area like Berkeley and home of University of Michigan):
Ann Arbor Median Income - $82,400 Median Home Price - $200,000
SF Median Income - $91,200 Median Home Price - $745,000!!!!
Wow, that Housing Op Index is really something! I have lived in the bay area for so long that I have gotten used to the costs and accepted it ... however, I was not thinking about buying a home before. I agree that there are so many other places in the country, and similar enough to Berkeley, that are worth moving to. It is just hard to think about moving when ALL of your friends and family are here and when your kids are already making their own friends!
Last question about credit (for now)--at what point does a late payment affect your credit? We usually pay all of our bills on time, but have had the occasional misses which we then paid right away. Do you have to go 2 months before it reaches your credit?
Maybe I should check my credit now, so I don't have to the year before we are thinking about purchasing. ... Just trying to plan in advanced as we excitidly watch housing prices decline in the area! ... We were thinking that 2 years would be a good time ... any thoughts?
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