Thinking about buying a home...

[thegoat]

My significant other and I are thinking about buying a place in the next two years or so...We are a bit concerned about my student loan debt though and the effect it will have on us when we go to apply for a loan (will even be able to? how much? etc.)

We both have great credit rating +740 at least.

Our debt is: 70K in student loans
Car debt: 10K
otherwise that's it for debt

Our income is roughly 160K gross..

Basically we are saving up and are wondering if we should be paying down the student loan debt or not even bothering and using that money as a down payment?


The Student loan debt interest rates are fairly low (highest being 6.5 and lowest is 3.75)..

The car loan is 2.5% for it's interest rate...


Thanks for the advice guys.

[Cylenchar]

What are your monthly payments on your car loans and student loans? What size house are you looking for? How much down payment do you plan to put down?

[thegoat]

$300 - car loan
$285 - student loan
$392 - student loan

House/Condo - roughly 1200-1800sqft probably (boston area)

We'd like to put down as much as possible really...ideally at least 10-20%

[disneysteve]

Originally Posted by thegoat

Our debt is: 70K in student loans
Car debt: 10K
otherwise that's it for debt

Our income is roughly 160K gross..

When we bought our house, I had $102,000 in student loans, a small balance on a car loan (maybe 5K - don't remember) and an income of 85K gross. We had no problem at all getting approved for a loan. You earn twice as much and owe 30% less. I don't see you having a problem no matter what you do.

[Cylenchar]

Based on those numbers, I wouldn't worry about paying more of the student loans off, save up as much as you can for the house, and then try to set aside an emergency fund/ savings fund to cover moving expenses, furniture,appliances, paint, ect. If you need/want to pay something off, I'd pay that car loan off as you get bigger bang for your buck.

[maat55]

If you were to really focus on debt reduction, you should be able to payoff much, if not all, of your debt within two years. Within another year you could have a good down payment and EF.

You could buy a house sooner, but I would leave room in your budget to payoff debt and save. Many people buy too much house, leaving little room for savings when carrying substancial debt.

[jIM_Ohio]

I think the question asked was good, but the overall direction of the follow ups is misguided.

On a 160k gross income you can clearly afford a house. The question is where are you spending your money now, and how flexible are you in changing your budget? My wife and I make 50% less than you do and have a house payment approaching what yours will be.

Here is my analysis:

What is your rent payment?
What is the expected value of the mortgage (I would budget $450,000 for your area).
Compare what you pay in rent to a 400k mortgage (need 80k down). Using an interest rate of 6.25% I came up with a payment of $2500/month. This does not include property taxes.

Then look at the after tax cost of the $2500/month mortgage payment. You would have 24k of interest paid (in year 1). If in 25% tax bracket you get 6k of this back (25% of 24k). 6k is $500 per month- so the "after tax" mortgage payment is $2000.

Then compare the $2000 to the current rent payment. If you pay $1200/month in rent you need to do a few things to find the extra $800.

1) Make sure you have a budget NOW which sets aside 20% of the 160k gross income. This means you need to be saving 32k per year.
1a) 15% of gross income (24k) should be set aside for retirement. 401ks would be good for this because you live in a high tax area. If you plan to retire to a cheaper location based on taxes, then use 401ks, if you plan to retire in same location, consider a Roth IRA. Roth will force you to pay taxes now, if you move before retiring, I am banking my advice on taxes will be cheaper in retirement. Boston area suggests Massaschusettes-so plan on 401ks being maxed to defer as much income from taxes now.
1b) 5% of your gross pay (8k) should be used for short term financial goals.
Regardless of own or rent, 1a) and 1b) will ALWAYS apply. No exceptions.
2) Within the budget, see if you can cut out the difference between the mortgage and rent ($800/month in the $1200/$2000 example). This is "free cash". For now you could either set the money aside or use it to pay down the student loan (highest interest rate first). If you do the 401k thing, your income should be reduced enough that the student loan interest is deductable as an adjustment to income on the tax return- further short term tax savings.
3) Buy the house when the payment fits into the budget. It might mean paying off the loans and the car, it might mean just eating out or spending less. Until I know details of your current budget, I could not specifically comment further.
4) if you did not do 1a and 1b and just went to get the house, more than likely any financial bump (like losing a job) would jepordize losing the house. If you follow 1a and 1b then you will always have 3 months mortgage payments in the bank and also be spending 20% less than you actually earn, so bumps can be absorbed in stride.

[Alex_Adviser]

Hi there,

If there are no pre-payment charges associated to the Students loan, then i would suggest you to pay off the Students loan as soon as possible. As you both have a good credit score, i dont see that you will have any problems getting a home loan. You position is already quiet good.

All the best ................

[Investing First Steps]

I agree with Jim that it's much more about your desired lifestyle than whether you can 'afford' it. You clearly can, so if you'd rather have the house, go for it. But if you'd rather have the security of having cleared out that debt, that's another consideration.

One other factor on large debts that are not too expensive interest wise is that you've given yourself a hedge against inflation. A small consideration, but something to think about.

[jeebuss31]

We're in the same boat as you. I have a car payment of $343.17 and my fiancee has $80k student loan to pay off. Your combine income is about 5-10% higher than ours. The only thing is that we've been saving and doing this for 2 1/2 years. Will this be the 1st yr you both be making $160k?

We decided to live our lives and did not pay off all of the student loans. Instead we saved up for big down payment and building a home while, paying off student debts. It's doable for us, but we're planning on kids later and that'll be a challenge. But hey, life's all about challenge.
Depending on your age and preferences, what's more important: paying off student debts or save up and purchase a home? Everyone has a different lifestyle/goal.. How much do you guys have saved up?

[ScrimpAndSave]

I'm seeing a lot of similiarities to my situations...except our student loan is greater and our income is smaller...

[jIM_Ohio]

Originally Posted by ScrimpAndSave

I'm seeing a lot of similiarities to my situations...except our student loan is greater and our income is smaller...

More importantly what advice can you share? I agree situations are similar but I think this poster is further ahead because of less debt.

I saw you posted and was looking forward to seeing the advice you gave based on how you are leaning on dealing with your own situation.

[JinCO]

We were facing a similar choice about 3 years ago. We had just finished graduate school, had decent incomes, and high student loan debt. Our decision was to purchase a place at a low enough cost that would enable us to continue to pay off the student loan debt fairly aggressively. We bought a 2 bedroom condo and were able to pay about $20K per year towards the loans. After about a year and a half in the condo we had a child, and quickly ran out of space. We then bought a home for more money making it harder to pay down the student loans. Luckily our salaries have gone up enough where we are back on pace to pay about $20K per year towards the loans and still save for retirement, etc. Looking back we should have probably waited a few more years to start having kids, but it has all worked out.

[gamecock43]

I would not have any advice because I have never been in a situation to owe that much debt...and I have never been in a situation to have such a large income! I really cant imagine that lifestyle or the burden of that debt- and so I don't know how I would be motivated to act in that situation. good luck though and keep us updated!

[disneysteve]

Originally Posted by JinCO

We were facing a similar choice about 3 years ago. We had just finished graduate school, had decent incomes, and high student loan debt.

As I said above, we've also been there-done that. I finished residency in 1993. We had a combined income of about 85K. I owed 102K in student loans.

We chose to buy a modest home. We paid 142K, less than 2x income. That allowed us plenty of disposable income so that we could aggressively pay down the debt. I finished repaying the student loans in 12 years which was 13 years ahead of schedule. It also left us room to save money every month, gradually increasing the savings rate as my income rose. Plus, it allowed us the freedom for my wife to become a SAHM when we started our family in 1995. She stayed home for 10 years. Had we bought the maximum house we could have qualified for, none of that would have been possible. We would have been trapped by the mortgage and my wife probably would have needed to keep working full time.