House / Debt / Dave Ramsey question

[mpweaver4]

I currently owe 65K in student loan debt. I have my car paid off, have zero credit card debt, and make about 45K per year. I'm currently paying about $400 per month for rent, including utilities. I also have 2K in an online savings account.
Now, I listen to Dave Ramsey here and there while at work. I know he would advise me to get all my student loans paid before taking out a mortgage. Do you all agree? I'm really itching to get a place of my own, esp. now when I can get a decent deal on a house.

Should I keep paying the lower rent and paying down my student loan? Or, pursue buying a home.

[Broken Arrow]

I was talking to a friend earlier about the housing market. It's true that house prices in general have gone down and that it's a buyer's market. However, I had to also point out that just because something has gone down in price, that doesn't mean everybody can afford it. A house is still a huge purchase.

In my personal opinion? Probably just keep paying off the debt, even if it is student loan. However, it really depends on what your numbers look like and whether lenders think you can afford it or not.

One easy way to find out is to go to your local bank or credit union, and ask them if such a loan would be feasible. If they're not too busy, they don't mind at all if you sit down with them, look at a bit of your background and crunch some numbers. It may or may not require running a credit check though. Just FYI.

[MYOM]

The $65,000 student loan is getting in the way of investing in a better property. I'm with Dave on this one. In addition, it would be wise to increase your Emergency Fund from $2,000 to $9,000 before buying a home. Where is all your money going? Penny wise will help you be more frugal with that $36,000 net income.

Dan Clemons, author Manage Your Own Money

[rooskers]

It is very easy to see if you can afford it. Find the price of the house you want and use one of the online calculators to estimate the price. Look up what the taxes would be and call your insurance to get an estimate of what it would cost to insure the house.

Now take that number and add about $200 more a month to include possible repairs, problems that could arise when owning the house and the higher cost of utilities compared to an apartment. Now put that money in a high yield savings account for the next 6 months. If can make the monthly payments easily and do not fall further into debt but instead are still able to save then you know you can afford it. On top of that you have added to your down payment.

[mpweaver4]

Thanks for the responses. My extra money has been going towards my student loans, until recently where I've been putting $300 /month in an online savings acct. I also do need to focus on being more frugal and limit my spending.

[jIM_Ohio]

What do properties cost, have you looked at what a 30 year mortgage would be, and how much are you putting into retirement accounts right now?

Not all of Dave Ramsey's advice on investing and saving will be accurate... the advice he gives is very general, designed to prevent you from carrying significant debt.

Some of us here carry significant debt and also invest heavily, so from my point of view, DR advice is misguided in some cases.

Post your detailed expenses and yearly/monthly income for more specific advice.

[mpweaver4]

Ok, here are my expenses....

Salary: 45,000 (add 3K to that for bonuses, but I'm not going to count on that for next year)

In the past 2 years I've paid off my car, but haven't always been frugal in my spending (like an idiot)

Monthly expenses:

Student Loan Min payment: $624 (owe 65K)
Phone: $55
Rent + Utilities: $400
Car Insurance: $120

Necessities -
Gas: $125
Food: $200

Avg. Monthly Expenses: Approx: $1,500

I currently have about 7K in my 401K and 2K in my online savings acct. I'm 25 yrs old and HATE my student loans!!!! I feel like they are setting me back years. I've considered getting a second job waiting tables or something.

I could find a home that fits my needs for somewhere in the range of 100-120K. I was contributing 10% of my salary towards 401K, but have recently stopped.

Thanks all that are giving feedback

[disneysteve]

Originally Posted by mpweaver4

2K in my online savings acct.

I could find a home that fits my needs for somewhere in the range of 100-120K.

I was going to post a more verbose response until I read this. This pretty well seals it for me.

How can you possibly buy a home for 100-120K? You have virtually no savings. Where will the 20% downpayment come from? That's 20-24K. You simply don't have any money to go home shopping with.

[mpweaver4]

I neglected to state that I will have 8 to 10K saved by April of next year. I am a first time homebuyer and may not put the 20% down.

[disneysteve]

Your monthly expenses now are $1,500, so a 6-month EF is $9,000. Your expenses will rise once you own a home, but even if we ignore that, you need an adequate EF, you need moving expenses, closing costs, probably some money to furnish and equip a home, etc.

I don't recommend a 10% downpayment, but even if you go that route, you are still talking about 10-12K down plus other expenses. Have you run the numbers to see what your monthly costs would be to own a home? I think you need to do that. Look at loan payments, taxes, insurance, utilities, etc.

Sorry, but I still don't see where the money is going to come from to do this in a financially responsible way.

[creditcardfree]

Having purchased a home for just under 100K in the mid 90's on a similar income with more savings, no student loans, and a small car payment, I would suggest waiting...so many things come up with a purchase of a home that will have that student loan hanging on your back for years, if you don't make it the priority now!!

There always be great deals on houses and most likely a better one, if you have that student loan paid off and more savings in the bank.

Make a plan of how to attack the student loan...the quicker you attack this, the quicker you get into a home of your own.

That is a nice rental payment you have...hold on to that because it leaves you more money to pay the loan off with.

[disneysteve]

Originally Posted by creditcardfree

Having purchased a home for just under 100K in the mid 90's on a similar income with more savings, no student loans, and a small car payment, I would suggest waiting...so many things come up with a purchase of a home that will have that student loan hanging on your back for years, if you don't make it the priority now!!

We purchased our home in 1994. At the time, we made about 85K. I had $102,000 in student loans. We put down 20% - $28,400 (with a little help from parents). We had savings of about 6-8K also as an EF.

I'd suggest that you tighten your belt, cut the spending to a minimum, sock away money, build your EF, save up a real downpayment and knock down the loans more before you go house hunting.

[poundwise]

Are you aware that less than 20% down will result in you having to pay PMI, private mortgage insurance, along with your principal and interest payment? Be sure to factor that in when you calculate the monthly payment on a home purchase.

LINK

[mpweaver4]

well thanks for the feedback. I clearly have to do my due diligence here. So you obviously do not recommend low or no money down? My roommate who I am currently paying rent to, put 2% down. In the end he needed about 8K for closing costs and that 2% down.

[poundwise]

Originally Posted by mpweaver4

well thanks for the feedback. I clearly have to do my due diligence here. So you obviously do not recommend low or no money down? My roommate who I am currently paying rent to, put 2% down. In the end he needed about 8K for closing costs and that 2% down.

As I mention above, not having much money for a down-payment means paying PMI.

It also means you have very little equity in your home from the get-go. If home values fall, you can easily find yourself upside-down in your home loan.

Another thought, if you need to sell your home in a few years but have no or little equity, you could find yourself losing money rather than prospering by having purchased a home.

[disneysteve]

Originally Posted by mpweaver4

So you obviously do not recommend low or no money down?

Exactly. Do you watch the news? So many of the foreclosures are due to people buying houses with little to nothing down, then seeing the value of the homes drop leaving them upside down on their loans, unable to sell because they couldn't afford to take a loss.

Years ago, 20% was the standard requirement, and it was a good one. If lenders would have maintained that standard, we wouldn't be in the mess we're in now.

[mpweaver4]

Thanks all, sounds like i need to do like you said and really attack my student loans before I take on more debt...

[disneysteve]

Originally Posted by mpweaver4

Thanks all, sounds like i need to do like you said and really attack my student loans before I take on more debt...

Actually, that's not entirely what I'm saying. When we bought our home, I had $102,000 in student loans. But I also had a 20% downpayment and another $6,000-8,000 or so in savings.

I think what you need to do is pick through your spending habits with a fine tooth comb and slash and cut everything you can. Get your savings rate up to 20 or 30% or more. Build up an adequate EF of 6 months of expenses. Save up a 20% downpayment. And, in the process, chip away at the loans. I don't think the loans need to be gone before buying a house. I just think the overall picture needs to be better in regards to savings.

[mpweaver4]

Thanks steve. I agree 100%. I think I'm going to seriously consider a secondary source of income to speed up the process.

[jIM_Ohio]

Originally Posted by mpweaver4

Ok, here are my expenses....

Salary: 45,000 (add 3K to that for bonuses, but I'm not going to count on that for next year)

In the past 2 years I've paid off my car, but haven't always been frugal in my spending (like an idiot)

Monthly expenses:

Student Loan Min payment: $624 (owe 65K)
Phone: $55
Rent + Utilities: $400
Car Insurance: $120

Necessities -
Gas: $125
Food: $200

Avg. Monthly Expenses: Approx: $1,500

I currently have about 7K in my 401K and 2K in my online savings acct. I'm 25 yrs old and HATE my student loans!!!! I feel like they are setting me back years. I've considered getting a second job waiting tables or something.

I could find a home that fits my needs for somewhere in the range of 100-120K. I was contributing 10% of my salary towards 401K, but have recently stopped.

Thanks all that are giving feedback

You need a financial and savings plan.

45k gross means you need to be saving 20%=$9000 per year. $6750 of this needs to go into 401ks or IRAs and $2250 of this needs to be going into cash savings for the EF and house.

I agree you should plan to put 20% down. Whether you choose to or not is another issue. Just because you don't have to does not mean you shouldn't plan on the 20% (the 20% will give you choices which will probably save you money).

Are all the student loans one loan or one account? Or do you have 4 loans with 4 different lenders? My advice is to round each one up to nearest $100. If one bill with one payment of $624, send $700 each month. Make sure you are on a 10 year repayment schedule.

In addition if the student loan debt makes you think you are being held back, how will a mortgage which is twice as expensive (120k relative to 60k student loans) make you feel for 3 times as long (30 years vs 10 years for student loans). Carrying debt is not a bad thing.