Yes, I have my student loans. Yes, I might be paying on them for a long time. But that doesn’t mean I am subject to living out of rentals. If it makes sense, I encourage ownership over renting a house. While it is scary taking out yet more loans and adding more debt to the collection, a house is a tangible asset that can easily become not only your sweet haven but also the largest investment of your life. Your hard earned dollars will go toward something which you may very well see a return on rather than in rental la la land. Secondly, you may see your house value increase after purchasing giving you what is called capital gains and equity. Even if you do not eventually pay off the mortgage, the increased value can mean some extra cash in your pocket when you go to sell.
Depending on what market you live in, ownership will make more sense. First of all, if you are lucky enough to live in an area where the housing prices are reasonable enough you could be looking at a monthly mortgage amount competitive with the monthly rental amount. Thus, this situation is a no brainer. Ownership also makes sense if you are planning on staying put for a long time. There are no new leases and no landlords to deal with. Furthermore, you can create that dream space, man cave, perfect zombie apocalypse hideout that you’ve always wanted.
While most would agree with all the great things about home ownership, qualifying for a mortgage is another story. Is this feasible with student loans? Absolutely. I just closed escrow on a house and I’m moving in with my half a million dollars of student loans strapped to my back. Here are some of my tips to qualify for a mortgage:
1. Its all about late payments. Late payments are displayed on your credit as 30, 60, or 90 days late. Do not be late on anything! I repeat, do not be late on anything! Not only do late payments negatively affect your credit score, mortgage companies see late payments as a struggle to pay bills.
2. Credit score. I once heard someone say that to live very well in America you don’t need a lot of money. You need good credit. Nothing holds more true than taking out a home loan. Protect your credit like its your golden ticket. I will eventually post another blog on this issue.
3. Debt to income ratio. This is simple to calculate. Take all your monthly payments and add them up. Divide this by your monthly income. Banks generally want to see a 40% or less DTI ratio to qualify for a mortgage. This is also how you can determine how much house you can afford. How much you can afford as a monthly payment is processed backwards to determine the overall purchase price of a house you can afford. The caveat is that certain things that are monthly payments are not counted in your DTI ratio such as utilities, cell phone, any type of insurance, health care bills, and all others that do not get reported to the credit bureaus. There are certain banks that may actually exclude student loan payments in calculating your DTI as well. The mortgage I am receiving included. This is how I was able to qualify for a house using just my income alone without my husband, as the bank I am using has completely ignored my monthly student loan payment. For specific questions on this feel free to contact me.
4. Down payments. Gone are the days of 2005 when you could buy a house with zero money down. These days, a down payment of 5-10% plus closing costs seems to be industry standard. So expect some up front money to get into the house. Remember this is a long term investment.
5. Time on current job. Mortgage banks are interested in one thing. Job stability. Don’t expect to be approved for a loan if you have changed jobs multiple times in the last few years. There could be some leeway if you are changing employers in the same line of work, but if you are working as a limo driver for 3 months, then a chef for 6 months, then a teacher for 4 months this is a huge red flag. As a physician I won’t run into much trouble changing employers as I would likely remain in the same line of work. They want to see 2 years of stable employment in the same line of work.
There are a few highly valuable tips I can give you if you are considering owning a house. Don’t be discouraged by the consideration of taking on more debt while still burdened with high student loans. You can pay $1000 a month in rent or $12,000 a year to someone else, or you can have that money go to a tangible asset. If you have determined that you are not able to qualify for a mortgage at this time, there’s no room to panic. Now’s the time to speak with a mortgage banker and determine what it is that is disqualifying you. You may not qualify now, but with a couple of changes you may be able to qualify in a few months or a year from now. Most importantly, don’t let your student loan burden weigh you down from continuing to invest in your financial future. Develop a plan for your student loans and stick with it. Have that plan in place prior to pursing a mortgage. And as always, keep the student loan hustle going!
Dr. J
