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Q: I have several student loans. (I've deferred payment on them.) Should I consolidate them before I apply for a mortgage?
A: I assume your loans are in deferment not because you have claimed economic hardship but because you're attending school. If so, consolidating could make a lot of sense. By combining several loans into one, you might be able to take advantage of a lower interest rate. You're also more likely to stay current on your debt if you have only one monthly payment to worry about. Go to LoanConsolidation.ed.gov to learn about consolidating federal loans. (I'd choose a standard ten-year repayment option.) If you have private loans, contact your lender directly. You can also apply for the program offered by a group of credit unions at CustudentLoans.org after you graduate.
Once you have determined the amount of your monthly student loan payment, you'll have a better understanding of whether you can actually afford to buy a house. Don't forget to add 30 percent to your base mortgage amount—you'll need that much money to cover property tax, insurance and maintenance costs.
Most lenders require potential borrowers to have a monthly total debt-to-income (DTI) ratio no greater than 43 percent. (That number includes credit card balances, car and student loans and mortgages.) According to the mortgage data firm Ellie Mae, though, recently approved loan applicants had an average DTI ratio of 38 percent. If you're carrying significant student loan debt, maintaining that ratio might prove difficult.
Q: I'm a 27-year-old married medical student and new mom who has taken out $120,000 in student loans, $35,000 of which I have in cash. Instead of applying the money toward future tuition, my husband and I are thinking of buying a condo, which we'd rent out to earn extra income until I finish school. We own our house and pay our bills using my husband's salary. Does our strategy make sense?
A: Not to me it doesn't. How do you expect to come up with $35,000 when you need to write a check for tuition again? And when you say "buy" a condo, does that mean you plan to pay in full or merely offer a substantial down payment? I also wonder if you own your home outright or if, like most 20-somethings, you have a mortgage. The point is, $120,000 in student loans plus mortgages on your home and a new investment property would saddle you with too much debt.
If you are certain you won't need the money you've borrowed for tuition (and your emergency fund and retirement savings are on track), your first goal should be to pay down any existing school debt that has a variable interest rate. By the time you graduate, these loans could cost more; the Federal Reserve has indicated it intends to keep interest rates low only through mid-2015. Frankly, I'd rather you use extra cash to pay down fixed-rate school loans as well.
I'd also advise you and your husband to buy 20-year level-term life insurance policies, since each of you is vulnerable should something happen to the other. You're completely dependent on his salary; he may have to repay your privately held loans, which aren't necessarily forgiven when the borrower dies. At your age, a $1 million policy would probably cost around $50 a month. That's a healthy investment for the future of your family.
Next: Should you pay interest on a loan from a friend?
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