Mortgage meets student debt
December 9, 2014
We recently got down into the student-loan trenches with two debt-laden millennials—one who figured out how to buy a home and one who expects to be digging out of debt for the next six or seven years. There’s no denying that student loan debt is delaying homeownership for some young buyers. But does your particular debt scenario make you one of them?
In short, don’t self-diagnose.
Talk to a homeownership advisor
“There are so many factors involved,” says Kathy Cummings, senior vice president of homeownership solutions and education executive at Bank of America. “You won’t know until you speak to a mortgage professional or a nonprofit housing counseling agency whether it’s doable or not.”
While not an expert on student loan debt, Cummings works nationwide with nonprofit counseling agency homeownership advisors on preparing people for homeownership. She’s absorbed a lot and become convinced of the important role these agencies can play in helping you evaluate your situation and strategize. “They’re going to give you an objective, third-party opinion on your personal situation,” she says.
You can search our national list of homeownership advising partners right here on our website.
Get clear on your goals and values
The first step of the homebuying process is actually the thought process.
“The feedback I’m getting from counseling agencies is, what it really amounts to at the end of the day is it’s another aspect of personal finance, and personal finance is all about choices,” says Cummings. “What your lifestyle is going to be, what you want to spend money on, and what your financial goals are.”
“One of the first things the counseling agencies I work with suggest is to sit down and map out what your financial goals are,” she says. “That can help you get an idea of where your values lie and what you really want to focus on. Some folks are looking to save for their children’s college educations. If that’s not your goal, maybe you can put more towards a mortgage payment.”
Maybe you’ll realize that buying doesn’t actually fit in with your goals, a least for the time being. For example, says Cummings, “If you’re just starting out in your career, you may want to be able to move to a different city to advance, so renting may be a better option for that flexibility.”
Make a strategy for dealing with the debt
A homeownership advisor can work with you on a budget and help determine the best strategy for paying down your debt and building your savings.
“Some folks pay every cent they can by working multiple jobs just to get the student loan behind them,” Cummings says. “They use all of their found money, like tax returns and gifts, to pay down the debt as fast as possible, so they can have that fresh start.”
Others find it more advantageous to stick to the long-term payment plan, knowing that over time, the monthly payment will shrink as a percentage of their budget. “More than likely,” she says, “you’re going to be making more with your college education than you would have had you not gone to college, so you’ll be able to absorb the payment.”
Online tools can also help you create a plan for building your down payment or meeting whatever other financial goal you might have. Bank of America has one in its online banking space.
How much debt is too much?
For housing to gross income, the rule of thumb is 28 percent or less, Cummings says. And for total debt, including your housing, any student loans, any revolving credit card debt—any debt that’s going to take more than 10 or so months to pay off—you want to come in below 38 percent.
If you don’t make these numbers, you might still be able to buy a home, Cummings says. It can depend on the housing market in your area, or on the options you have for changing your numbers. For example, do you want a home more than you want a car? “Consider moving to an area that has excellent public transportation. Maybe you can get rid of your car loan, depending on what city you live in and what the infrastructure is like.” Suddenly, you have less debt and more income.
That said, don’t max yourself out, she says. “It should be about what’s comfortable for your individual situation and the rest of your financial goals. The last thing you want to do is get into a home that’s not going to be sustainable.”
If it’s not too late: do a cost-benefit analysis
If you’re reading this, you’ve probably already got student loan debt. But on the off chance that you’re still weighing that loan, or you’re considering more loans for grad school . . .
“I asked a housing counselor several weeks ago what her advice on student loan debt was,” says Cummings. “She simply said, don’t enter into the debt without doing the math on your earning potential after you graduate. Her example was, if you’re taking on $100,000 in debt to become a social worker, it probably won’t make sense. However, if you’re taking on $100,000 to become a surgeon, you’ll more than likely be in a position to repay those loans in a timely manner.”
Whether your path is looking sensible or not so sensible at this point, once you’ve got the debt, keep going. “Where you really run the biggest risk is if you don't get your degree,” says Cummings. “You take on the debt but you don’t get your degree. That’s going to limit your earning potential.”
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