Student Loan Debt and Buying a Home

If you have a lot of student debt and you are trying to buy a home of your own, you may quickly realize that your student debt is an obstacle. Why do a lot of student loan debt and buying a home not play well together?

Student debt and back end Debt -to-Income Ratio (DTI): When applying for a mortgage loan, lenders will calculate your DTI. Basically they are comparing your income to your monthly debt payments. (Learn more about back end DTI here.) They want to know if you can afford the monthly payments on a home when considered with all of your other monthly debt payments. The more debt you have, the higher your DTI.

If your back end DTI exceeds the limit set by your lender (typically 43% or less) your mortgage application may be turned down. Even if you are approved for a mortgage, your DTI may still affect your ability to obtain down payment assistance. (HomeOwnership down payment assistance programs require a maximum back end DTI of 42%.)

How is your student loan debt calculated into your DTI? Lenders may use one of two different methods to determine your student loan payment on your DTI.

  • The 1% method: Some lenders simply determine 1% of your total student loan debt and use the resulting figure as your student loan’s contribution to your back end DTI. This method may work against you, especially if you are on an income based repayment program or have extended your student loan term beyond ten years.
  • The actual payment method: Using this method, the lender uses your actual monthly student loan payment as input to your back end DTI.

Which method will be used? That depends on a lot of factors. Are your loans in deferment? Are you on an income based repayment plan? What kind of mortgage will you have (FHA, VA, conventional, USDA, etc. Determining the method used can be complicated, so don’t be shy about asking lenders how they will consider your student loan payments when calculating your back end DTI.

None of this is to say that you can’t buy a home when you have student loan debt. People with student loans buy homes every day. However, having a lot of student debt can be a big road bump for may people on their road to homeownership.



Should You Buy an Old Home or a New Home?

Spring is here, your lease is up soon, and you are about to begin searching for your first home. One question that has probably popped up is whether or not you should buy an old home or a new home? There are pros and cons either way. You have to ask yourself – What is important and what do you want in your home?

Let’s look at some pros and cons for a bright and shiny new home first:

New Construction Pros

  • You can get exactly what you want, especially if you work with the builder when the house is under construction. You will have the opportunity to pick out carpet, appliances, and just about every other aspect of the home’s décor and construction.
  • You are the first owner. Everything in the home will be brand new and unused. This doesn’t mean that everything in your home will be perfect. Sometimes builders and tradesmen make mistakes or perform shoddy work. However, you know the furnace, appliances, and roof are brand new and shouldn’t require maintenance or replacement anytime soon. This means the home’s maintenance costs should be cheaper.
  • Your home will be built to modern standards and using contemporary designs and styles. Your energy costs could be lower and your home will have that modern layout and appearance.
  • New homes tend to be located in planned neighborhoods. Chances are that your home will be part of a newly constructed neighborhood. You might even have common amenities like a pool or clubhouse.
  • Your neighborhood could have a homeowners association that will work to maintain the property values in the neighborhood.

New Construction Cons

  • Your home probably doesn’t have the character an older home might have. You might not have the crown molding, high ceilings, or gingerbread trim that was common in the past.
  • Your builder may have built all of the homes in the neighborhood from a small selection of floor plans. This means that you are likely to find that many of your neighbors own very similar homes.
  • You could have a homeowners association that limits what you can do with your home and your property. They may want to approve your choice of exterior paint color and will probably not allow you to permanently store your boat and broken down car in the front driveway. Home owner associations also mean paying dues, which help to make new construction generally more expensive.

Not all home buyers think alike. You might want an older home full of charm. Here are some pros and cons for existing homes (also called a resale home):

Existing Home Pros

  • You won’t have a cookie cutter design. Chances are that you will have more choice in floor plans and a smaller possibility of finding another home just like yours on the same street. Have you ever driven to a friend’s home in a new neighborhood and struggled to pick out their home because all of the houses look alike? That won’t be a problem with an older home.
  • You don’t need to worry about the hassle of going through the new construction process. This means you will have fewer decisions to make and you won’t need to face living in a neighborhood that looks like a construction zone.
  • Your neighborhood will be established.
  • You get that old home charm and character that can’t be found in a brand new home. Want a gorgeous front porch? You can find it in an older home. Want all of that fancy woodwork and those great built-ins? You can find them in older homes.

Existing Home Cons

  • Your home will require more maintenance than a new home. Older appliances and heating/cooling systems become worn out and might need to be replaced.
  • Older homes tend to be less energy efficient and you will spend more money heating and cooling them. Older appliances will also be less energy efficient.
  • The home may have a dated design. If you want to live in an open concept home, you will struggle to find it in an older home.
  • Someone else has lived there before you! If you really want to be the first one to live in the home, an older home is not for you.
  • Renovations and updates could be in your future. Is that kitchen too small? Really want a master bathroom and walk in closets? To find modern layouts in an older home, you might need to plan on spending money on remodeling.

One Important Suggestion

Get an inspection! It doesn’t matter if the home of your dreams is a 1930s bungalow or a brand new glass house. Have the home inspected before you buy it. A professional house inspector will be able to tell you if the builder has made mistakes or if the furnace will need to be replaced in the next few years. So, pay the money for a home inspection and you will be able to sleep better after closing.


First-Time Homebuyer Programs Work

Have you been wondering if a first-time homebuyer education and coaching program is for you? A study reported by HUD could help you decide. The results of the study show that homebuyers who have completed a first-time homebuyer program are 1/3 less likely to fall 90 or more days behind on their mortgage than homebuyers that bought a home without homebuyer education and coaching. That is a huge difference and one that you should think about.

Still not convinced?

Another study reported by Freddie Mac found similar results with a 29% improvement in default rates over first-time buyers who did not complete a first-time education program. Additionally, the Freddie Mac study showed that there is a financial benefit to homebuyer education programs that averages $1,000 for the homebuyer. That is more than enough to cover the cost of the program. The bottom line is that First-Time Homebuyer programs work and they can save you a lot of money.

Want to learn more about Homeownership education and coaching in the greater Dayton area?

The HomeOwnership Center of Greater Dayton is a HUD approved non-profit agency that promotes sustainable homeownership. We provide classes on-line and in person. Call us at 937.853.1600 or learn more here: First-Time Homebuyer Program.

You Need a Home Inspection

You found the home of your dreams and you are ready to make an offer. Before you go any further, you need to think about having a home inspection.

Why do you need a home inspection?

The home inspection is your opportunity to learn about the home’s physical condition from a professional inspector. You will know if the furnace is on its last legs or if the roof is leaking or if there is dry rot in the garage walls. The inspector will check out the home from top to bottom, including the major systems such as electrical, plumbing, heating and air conditioning, and gas. With the inspection in hand, you are less likely to be surprised by an expensive repair after you buy the home. You can also ask the seller to make necessary repairs or reduce the price of the home, so that you can have the repairs made yourself.

How do you go about a home inspection?

  • The first step is to have a home inspection contingency placed in your contract. The contingency will allow you to back out of the contract without losing your earnest money, if you are not satisfied with the results of the inspection.
  • Once you are under contract, you need to arrange for the home inspection to take place.
  • You will need to look for a certified professional home inspector with a good reputation. Ask your real estate agent or lender for recommendations. Interview the inspector before you hire him to ensure you will be satisfied with his work.
  • You will need to set up a time for the inspection to take place.

How long will a home inspection take?

A typical home inspection will last around 2 to 3 hours. Larger homes may require more time. Keep in mind that your inspector will need time to do a thorough job. You should plan on being there with him so that you can ask questions when he finds a problem.

How much will a home inspection cost?

A typical home inspection in the Dayton area will currently cost around $375 and is money well spent.

Pay attention to the inspection results.

When the home inspection is complete, your inspector will give you a written report that shows what he found. Read the report carefully so that you can make a good decision about going forward with buying the home. Share the report with your real estate agent to get their opinion on the report’s findings. If the report finds that repairs are needed, ask the seller to make the repairs before you close or ask them to reduce the price of the home if they are not willing to make the repairs.