House / Debt / Dave Ramsey question

[disneysteve]

So you obviously do not recommend low or no money down?

Exactly. Do you watch the news? So many of the foreclosures are due to people buying houses with little to nothing down, then seeing the value of the homes drop leaving them upside down on their loans, unable to sell because they couldn't afford to take a loss.

Years ago, 20% was the standard requirement, and it was a good one. If lenders would have maintained that standard, we wouldn't be in the mess we're in now.

[mpweaver4]

Thanks all, sounds like i need to do like you said and really attack my student loans before I take on more debt...

[disneysteve]

Thanks all, sounds like i need to do like you said and really attack my student loans before I take on more debt...

Actually, that's not entirely what I'm saying. When we bought our home, I had $102,000 in student loans. But I also had a 20% downpayment and another $6,000-8,000 or so in savings.

I think what you need to do is pick through your spending habits with a fine tooth comb and slash and cut everything you can. Get your savings rate up to 20 or 30% or more. Build up an adequate EF of 6 months of expenses. Save up a 20% downpayment. And, in the process, chip away at the loans. I don't think the loans need to be gone before buying a house. I just think the overall picture needs to be better in regards to savings.

[mpweaver4]

Thanks steve. I agree 100%. I think I'm going to seriously consider a secondary source of income to speed up the process.

[jIM_Ohio]

Ok, here are my expenses....

Salary: 45,000 (add 3K to that for bonuses, but I'm not going to count on that for next year)

In the past 2 years I've paid off my car, but haven't always been frugal in my spending (like an idiot)

Monthly expenses:

Student Loan Min payment: $624 (owe 65K)
Phone: $55
Rent + Utilities: $400
Car Insurance: $120

Necessities -
Gas: $125
Food: $200

Avg. Monthly Expenses: Approx: $1,500

I currently have about 7K in my 401K and 2K in my online savings acct. I'm 25 yrs old and HATE my student loans!!!! I feel like they are setting me back years. I've considered getting a second job waiting tables or something.

I could find a home that fits my needs for somewhere in the range of 100-120K. I was contributing 10% of my salary towards 401K, but have recently stopped.

Thanks all that are giving feedback

You need a financial and savings plan.

45k gross means you need to be saving 20%=$9000 per year. $6750 of this needs to go into 401ks or IRAs and $2250 of this needs to be going into cash savings for the EF and house.

I agree you should plan to put 20% down. Whether you choose to or not is another issue. Just because you don't have to does not mean you shouldn't plan on the 20% (the 20% will give you choices which will probably save you money).

Are all the student loans one loan or one account? Or do you have 4 loans with 4 different lenders? My advice is to round each one up to nearest $100. If one bill with one payment of $624, send $700 each month. Make sure you are on a 10 year repayment schedule.

In addition if the student loan debt makes you think you are being held back, how will a mortgage which is twice as expensive (120k relative to 60k student loans) make you feel for 3 times as long (30 years vs 10 years for student loans). Carrying debt is not a bad thing.

[disneysteve]

it really depends on what your numbers look like and whether lenders think you can afford it or not.

One easy way to find out is to go to your local bank or credit union, and ask them if such a loan would be feasible.

BTW, I had to comment on this, BA. I think asking a lender if you can afford something is a bad idea. As we've seen with the whole housing mess, lenders will lend you the most they possibly can whether you can afford it or not. That's gotten better recently, but I still read stories of people today getting loans they really shouldn't be getting.

The way to figure out what you can afford is by having a detailed budget and spending plan and running the numbers yourself to see if you can afford it. Then you can go and find out if you would qualify for the loan you've determined you can afford.

[rooskers]

The way to figure out what you can afford is by having a detailed budget and spending plan and running the numbers yourself to see if you can afford it. Then you can go and find out if you would qualify for the loan you've determined you can afford.

I would take it a step further. Do exactly that but then actually try to live by those numbers for at least 3-6 months and put the money in a savings account. Sometimes things look good on paper but for some reason or another you can't work it out in real life.

[creditcardfree]

Good advice, rooskers.

[mpweaver4]

thx for the advice. My student loan is one private loan. My interest rate is 2.5% + 3-mo. LIBOR rate. Not having a fixed rate is very unsettling, another reason why I feel like i need to do everything i possibly can to make big payments on it when I can.

[maat55]

There is no need to be in a hurry. Jim and Steve have laid out good advice for you to go by. The rent you are paying now is much less than the interest, insurance and upkeep you will pay on a house, so don't think you are missing the boat. Be patient and do this right.

[mpweaver4]

Good points, and I have had that feeling like now is the time to buy and i need to take advantage. But I've heard some great advice on here from these guys. The feedback is really appreciated.

[rizzmo]

My wife and I just purchased a home for 132k. We paid the 20% down and are still left with a 10k EF. Additionally we have no debt, except for DW student loans. We will not need to make payments until she finishes ~5 years, in which time we will have the mortgage paid off.

If we currently making payments on the student loans those would have gone first.

Jim I have seen you post serval times 20% of gross should go towards financial independence? I am curious what you are basing this advice on?

[jIM_Ohio]

Jim I have seen you post serval times 20% of gross should go towards financial independence? I am curious what you are basing this advice on?

I am starting to get into financial planning a little more, and I think most of the advice out there is geared more towards debt and less towards what makes most sense.

15% to 401k is out there by many. Having an EF is out there by many. Living on less than you earn is out there by many.

The 20% is a combination of all the above.
Send 15% to retirement accounts
Send 5% to EF or other financial issues (short and mid term goals).
Live on 80% of gross- meaning you are living on less than you earn.

[rizzmo]

Thanks for the explanation. It sounds like a good rule to follow for the majority of people.