House or education first?
July 15, 2010 7:49 PM Subscribe
Asking for a friend: "I'm going to be buying a house next summer. I want to finish my bachelor's degree before all the house craziness, but there are some complications..."
Paraphrased from my conversation with her:
"I'm only one semester away from finishing my bachelor's degree (had to take time off for nutzo life stuff), and would like to take care of completing it before I jump into buying a house. I'll be a first-time home buyer, buying by myself, so I want to do it right and not be weighed down by school, house and work, oh my!
The loan I'd have to take out is around $3-4k. My credit is pretty good; when I go to buy the house, I'll have no debt except student loans (car will be paid off, no credit card debt). Credit score is about 730. At this point, the bank will lend me approx. $120k.
Basically my question is this... is the student loan going to be a hit to my credit big enough to prevent me from buying the house I want? Or is the amount small enough that it's not really going to affect it either way? Is the fact that it's a student loan going to be less of a credit hit? Am I over-thinking this?????"
I can't answer her question totally, so I come to the hive mind for help (I work in fraud, not consumer lending :P). I can follow up with her tomorrow if necessary, so if you guys need more info, ask away!
BTW, she's in New York, same as me.
Paraphrased from my conversation with her:
"I'm only one semester away from finishing my bachelor's degree (had to take time off for nutzo life stuff), and would like to take care of completing it before I jump into buying a house. I'll be a first-time home buyer, buying by myself, so I want to do it right and not be weighed down by school, house and work, oh my!
The loan I'd have to take out is around $3-4k. My credit is pretty good; when I go to buy the house, I'll have no debt except student loans (car will be paid off, no credit card debt). Credit score is about 730. At this point, the bank will lend me approx. $120k.
Basically my question is this... is the student loan going to be a hit to my credit big enough to prevent me from buying the house I want? Or is the amount small enough that it's not really going to affect it either way? Is the fact that it's a student loan going to be less of a credit hit? Am I over-thinking this?????"
I can't answer her question totally, so I come to the hive mind for help (I work in fraud, not consumer lending :P). I can follow up with her tomorrow if necessary, so if you guys need more info, ask away!
BTW, she's in New York, same as me.
My student loan debt was actually helpful to my credit score and credit-worthiness, but it was in the mid two-digits - secured government loan. Then again they were taking my income and assets into account, which you don't mention.
The loan your friend has taken out is very small. Banks want to make sure that you can pay back the loan you got with them, along with your other debts.
If your friend is basically talking about going straight from completing college to buying real estate, there are bigger questions to answer than whether $4000 in student debt will negatively affect a bank's view of her credit-worthiness.
posted by contessa at 8:49 PM on July 15, 2010
The loan your friend has taken out is very small. Banks want to make sure that you can pay back the loan you got with them, along with your other debts.
If your friend is basically talking about going straight from completing college to buying real estate, there are bigger questions to answer than whether $4000 in student debt will negatively affect a bank's view of her credit-worthiness.
posted by contessa at 8:49 PM on July 15, 2010
Assuming your friend must buy the house next summer, then the answer to how the student loan will impact her is "it depends."
- If she has not yet entered repayment on the student loan (i.e. it's still in post-graduation deferment or she has received a forbearance for whatever reason) then the student loan payment doesn't generally count against her debt-to-income ratio. If she has entered repayment, it does count.
I bring this up because if she is close to ~33% DTI (including proposed mortgage payment) before the student loan and it pushes her over, then virtually no bank will lend her money on a mortgage.
- If at all possible, ensure that only one loan (i.e. not a federal subsidized Stafford and a federal unsubsidized Stafford) is taken out so that only one new account will show on her credit report.
- Since "next summer" is, at best, 13 months away, she may have some explaining to do to a loan officer regarding the new debt within the past 12 months. This is unlikely, but possible. I strongly suggest avoiding taking any additional debt within the 12 month period preceding her house purchase. In the past this wasn't a big issue, but with banks already being skittish about mortgage loans, precautions are necessary.
- Above all else, do not miss that first payment. A first payment missed ("first payment default") is tragic when on a credit report and can definitely cost her the mortgage.
Of course, I entirely agree with dfriedman. Don't buy the house until the student loan debt is paid, unless this is a "must buy" for whatever reason. Even if it is "must buy," how absolute is the "must?" Also, the majority of the above is based on my experience with FHA loans.
posted by fireoyster at 8:56 PM on July 15, 2010
- If she has not yet entered repayment on the student loan (i.e. it's still in post-graduation deferment or she has received a forbearance for whatever reason) then the student loan payment doesn't generally count against her debt-to-income ratio. If she has entered repayment, it does count.
I bring this up because if she is close to ~33% DTI (including proposed mortgage payment) before the student loan and it pushes her over, then virtually no bank will lend her money on a mortgage.
- If at all possible, ensure that only one loan (i.e. not a federal subsidized Stafford and a federal unsubsidized Stafford) is taken out so that only one new account will show on her credit report.
- Since "next summer" is, at best, 13 months away, she may have some explaining to do to a loan officer regarding the new debt within the past 12 months. This is unlikely, but possible. I strongly suggest avoiding taking any additional debt within the 12 month period preceding her house purchase. In the past this wasn't a big issue, but with banks already being skittish about mortgage loans, precautions are necessary.
- Above all else, do not miss that first payment. A first payment missed ("first payment default") is tragic when on a credit report and can definitely cost her the mortgage.
Of course, I entirely agree with dfriedman. Don't buy the house until the student loan debt is paid, unless this is a "must buy" for whatever reason. Even if it is "must buy," how absolute is the "must?" Also, the majority of the above is based on my experience with FHA loans.
posted by fireoyster at 8:56 PM on July 15, 2010
I don't think that $4k in student loan debt will really matter that much ... banks do care about debt load, but they care about it when viewed in terms of overall income and ability to pay back the new loan that you're asking for. They also care about credit scores (because, it has been explained to me, credit scores are one of the things people look at when mortgages are resold) ... but it's hard to say what the student loan will do to your friend's credit score, because the credit score algos are proprietary, and there are other variables that we don't know anyway.
But I second the feeling that other people have put forward, that this cunning plan seems to have some holes in it. Like income. Your friend will need to show an income history with lots of nice, steady paychecks. Apparently the bank is willing to lend to them now, so apparently they must have something, but if they're planning on taking time off to finish their degree they should keep in mind that things might change.
Also, "preapproval" is not "approval." Lots of lenders will "preapprove" you for staggering amounts of money with very little paperwork, but this is basically meaningless. (It might let you put an offer down, subject to a financing contingency, but little else.) The actual application process is what counts, and it generally costs significant money (couple hundred bucks) and you have to provide a lot of documentation on all assets, income sources, debts, etc. This stuff gets sent to underwriters for review, who render an actual up/down decision on the loan.
A couple of people I know have been burned recently by lenders who 'preapproved' them and made it sound like they were shoo-ins for big mortgages, but then pulled the rug out from under them at the last minute — when they had offers down on houses that they were enthralled with — because the underwriters thought they were too risky for one reason or another.
posted by Kadin2048 at 9:07 PM on July 15, 2010
But I second the feeling that other people have put forward, that this cunning plan seems to have some holes in it. Like income. Your friend will need to show an income history with lots of nice, steady paychecks. Apparently the bank is willing to lend to them now, so apparently they must have something, but if they're planning on taking time off to finish their degree they should keep in mind that things might change.
Also, "preapproval" is not "approval." Lots of lenders will "preapprove" you for staggering amounts of money with very little paperwork, but this is basically meaningless. (It might let you put an offer down, subject to a financing contingency, but little else.) The actual application process is what counts, and it generally costs significant money (couple hundred bucks) and you have to provide a lot of documentation on all assets, income sources, debts, etc. This stuff gets sent to underwriters for review, who render an actual up/down decision on the loan.
A couple of people I know have been burned recently by lenders who 'preapproved' them and made it sound like they were shoo-ins for big mortgages, but then pulled the rug out from under them at the last minute — when they had offers down on houses that they were enthralled with — because the underwriters thought they were too risky for one reason or another.
posted by Kadin2048 at 9:07 PM on July 15, 2010
What does her financial advisor say? With interest rates at historic lows, what’s her view on their likely movement? If they double, or go into double figures can she service the loan?
The only issue that matters is whether she’s got a job to go to once she finishes her degree. No job, no mortgage.
posted by dmt at 3:24 AM on July 16, 2010
The only issue that matters is whether she’s got a job to go to once she finishes her degree. No job, no mortgage.
posted by dmt at 3:24 AM on July 16, 2010
If she finishes the degree, could she earn more money? That might offset any potentially small hit to her credit score.
posted by achmorrison at 4:49 AM on July 16, 2010
posted by achmorrison at 4:49 AM on July 16, 2010
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This doesn't directly answer your question but it is a way of circumventing concerns about the student loan's effect on further borrowing.
posted by dfriedman at 7:52 PM on July 15, 2010