How do we buy a house with a lot of educational debt?
June 3, 2010 12:14 PM   Subscribe

I finally graduated from grad school with a degree that can potentially make me a very decent salary. But...grad school at a private institution is very expensive and I have a lot of debt. Will my education loans keep me and my husband from buying a home for the first time?

I am totally clueless about buying a any advice would be much appreciated.

I have a "very good" credit history and my husband has a "good" credit history but I have just under 200K in education loans. Once I get a job I can safely bet on a starting salary of anywhere between 75-90K. It is also possible that I may be able to secure a position where I get an additional income to go directly to loan repayment.

One additional piece of information is that although my husband makes a good salary here when we relocate to Oregon his salary will be much less than it is now.

I guess my question is, how much will my student loans negatively impact our ability to get a home loan? Do lenders make decisions about the amount of educational debt that is acceptable based on income and/or potential income?
posted by teamnap to Work & Money (10 answers total) 2 users marked this as a favorite
yes of course they do. They'll take it into account when determining your fixed monthly expenses. Also potential income is not being used at the moment. That's sort of how we got into this mess.
posted by JPD at 12:16 PM on June 3, 2010

Yeah, this isn't rocket science. If you have a lot of debt you can't/shouldn't get more debt.

At any rate you'll need 5-10% as a downpayment so look look at your budget and figure out how long it will take to save that amount of money after your loan payments, rent, living expenses, etc. Once you have the downpayment, then you can worry about getting a loan.
posted by GuyZero at 12:21 PM on June 3, 2010

Response by poster: We have a substantial amount (probably closer to 20%) for a down payment since we have been saving for a few years. So really, we are already beyond that part of the equation.

Many people have told me that lenders look at educational debt differently than say, credit card debt. But I always thought debt was debt, which was why I wanted to ask the question here.
posted by teamnap at 12:34 PM on June 3, 2010

Best answer: IANYL(ender). From what I understand, credit reporting bureaus look at educational debt differently than credit card debt. From my experience with lenders (which is a different outfit entirely), they look at a standard debt-to-income ratio, without much of a category distinction. Someone, please correct me if I'm wrong. I've just gone through the process of purchasing a home, but I did not have the same circumstances as the OP.

So--to break it down, credit bureaus do treat student loans differently than credit card debt. This affects your credit score, which your lender will pull. You lender will figure your monthly student loan payment as a fixed monthly cost to help determine how much you can afford to pay in mortgage per month. If you have a decent amount saved up for a down payment, I don't see any reason for you to not be able to buy a house, even with your school debt, if you have enough income to support a mortgage. I would, of course, suggest that you wait until you have a permanent job to buy a house.
posted by litnerd at 12:44 PM on June 3, 2010 [1 favorite]

The banks would probably look at how much money you spend each month servicing your existing loan and take that into account when determining how much they can comfortably lend you. I don't see why they would treat your educational debt differently than credit card debt. (Though perhaps they would lend you less than normal if you had lots of credit card debt because they might see that as higher risk behaviour.)

I know that banks (in Canada) will extend (giant ass) lines of credit to medical students and law students because they know they will most likely get their money back. So in this case they are using a person's potential income to decide how much to lend. Perhaps that is the sort of situation your friend was thinking about.
posted by chunking express at 12:47 PM on June 3, 2010

Pre-meltdown, but we had significant student debt when we bought our first house. It was not a problem; they looked at our total monthly payments (which are much, much lower than comparable credit card debt, since it's a fixed-rate, 30-year payment plan or whatever) and our total income (as proven by a paystub or whatever). So you probably WILL need to show income of some sort, but with a 20% downpayment and adequate income to cover both your student loan debt and your mortgage debt, I don't really think you'll have a problem.
posted by Eyebrows McGee at 1:26 PM on June 3, 2010

I just got a mortgage, my student loan debt is higher than my annual income, but I have great credit. I wouldn't worry about it, just keep paying it on time, pay off some of the principal if you can.
posted by mareli at 1:47 PM on June 3, 2010

Best answer: It's almost costless to call up a lender/broker and ask them. They'll be happy to give you an idea of what you might get approved for, as they'll see it as a chance to generate business when you're ready to buy. I'd recommend also asking about documentation requirements, i.e. will you need paystubs to document your income? Tax returns (i.e. a whole year of income)? Will an offer letter from your employer be enough?
posted by deadweightloss at 2:10 PM on June 3, 2010

Response by poster: Thanks for the input.
posted by teamnap at 3:15 PM on June 3, 2010

The confusion about whether student debt is different or debt is debt is because there are really two different considerations.

The first thing is whether the banks trust you enough to give you a pile of money, given your past behavior in credit scenarios. In terms of how good of a credit risk you are, yes, student debt is absolutely considered as a different entity than consumer debt. This part will not interfere with your ability to get a house.

The second thing is whether they believe that you can afford the payments on that pile of money. In determining what you can actually afford, they consider your net income after taxes and large fixed expenses -- car loans, student loans, credit card payments, etc. In this case, debt is (sort of) debt. It's a little more complicated than that, as I understand it, but they are interested in how much money you have coming in, regardless of the nature of the other recurrent expenses. In this case, it's not so important what your total balance is, but how the monthly payments affect your monthly income.
posted by LittleMissCranky at 4:35 PM on June 3, 2010

« Older What car to purchase for my lifestyle?   |   Where to live in the Seattle/Tacoma area? Newer »
This thread is closed to new comments.