Hey all! Today we have a guest post from personal finance writer, Ben Steele.
SO I’ve lived in 3 countries, moved more times than that, I’m a 28 with a bunch of student loan debt BUT I have a house and a mortgage! Woo!
Everyone says that renting is throwing away money. That you need to start building equity, that it’s time you buy a house. You’d love a house, but there’s just one problem: Student loans take up a ridiculous portion of your monthly budget, and you’re not sure if you have enough savings to scare up a down payment. So should you take the risk? You can always sell it later, right?
As with most complex financial questions, the answer is “it depends.”
If you’re juggling student debt, there is good news and bad news when it comes to purchasing a house.
The Good News
The good news is that having student debt actually improves your credit score by a good deal. The catch, of course, being that you need to make your payments on time. If you have late or defaulted payments, you may be in for a nasty credit surprise on your credit report.
If you’ve been managing your money well, however, and have managed to stay on top of your monthly payments, taking on more debt might not be as difficult as you think. When looking at whether to give you a mortgage, banks are less concerned with how much debt you have than with your payment to income ratio, and whether you’re a prompt bill payer.
The other advantage to having a good debt payment history comes with the down payment. The better you credit, in general, the lower the percentage of your down payment on the mortgage.
The Bad News
Even if you’ve calculated that a mortgage payment would be manageable, you’re going to contend with a deluge of frustrating up-front costs. Apart from the down payment, you have hidden fees in the closing costs like taxes and insurance, not to mention a home inspection and costs associated with moving in.
If you don’t have a robust savings account, you may need to hold off on doing this until you’ve had a chance to build up a buffer. Even a low down payment, combined with everything else, could end up draining your savings. There are a number of major life events that will require savings, and not all of them are predictable.
Where Do You Start?
First, take pressure out of the equation. Drop the notion that you’re wasting money on rent, and don’t look to buy just because property is an investment. Making a bad investment is worse than not making one at all.
Consider whether you can afford a house, right now, along with all the associated costs and a 20 percent down payment. If you can’t comfortably do that, then you’ll need to create a savings plan. You might want to consult a financial advisor to talk over ways to balance loan payments and a steady savings account.
A financial advisor can also help you determine if there are better or more competitive loan options available to you, for example you may qualify for a first time homebuyer loan, or if you or your spouse previously served in the military you could qualify for a VA home loan. You’ll also want to explore local first-time homebuyer grants and programs. These are offered by many cities and states and could be available in your area. You can find more information on your city or state’s website by search for information on housing aid in your area.
If your loans are just too much to handle along with a mortgage, there are other options. With a steady income, it can be a good idea to refinance your loans or apply for a government income-based repayment program. This can reduce your payments or your interest to a more manageable level and help you get on with your life.
You might laugh, but don’t discount mobile homes. They can be surprisingly cosy, and the mortgage payment plus the land rental combined might well be less than your rent if you have an apartment in the city. It’s a great first stepping stone. They’re good candidates for helping you save and flipping after a few years. That way you can build equity without ridiculous payments, and have a financial asset to leverage when you decide it’s time to really settle down.
If you’re struggling with deciding whether or not you can afford a house, remember that loan payments can be an asset for your credit. While that can be an advantage for seeking a low down payment, don’t overreach and buy too early. If you find yourself unable to manage the loans and the mortgage in the future, it will have lasting repercussions on your credit.
Don’t be discouraged from starting small. A cheaper house is less risk, especially if the real estate market is wavering or unpredictable. With a little bit of extra planning, the future doesn’t have to be gloomy.