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Friday, August 24, 2018

Tips for Buying Your First Home Even with High Student Debt

What's up everyone!  So I keep finding articles online about college students finding it nearly impossible to buy their first home.  Many of them desperately want to do so for obvious reasons: Getting a piece of the American dream, building wealth, stop paying high rents, and so on.  This particular article pinpoints the main challenges young people with massive college debt are facing, namely,


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1.  A poor Debt-to-Income ratio.  Why this matters: How much you owe (loans and other credit card debts, etc.) compared to how much you make (your verifiable annual income) is utilized by lenders to approve applicants for mortgage financing.  

2.  Credit Score.  Why this matters: Well...your credit is a reflection of your ability to pay back small loans and handle OPM (other people's money) responsibly.  Your credit score is also used to get you prime (as opposed to subprime) loans and rates.

3.  Down Payment.  If you have loads of student debt, then you most likely have a high monthly school loan debt payment.  This hinders your ability to save money for a downpayment.  You're practically expected by all lenders these days to have at least a 20% downpayment.

Here is what I would do to overcome these challenges.


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Tip 1: Focus on increasing your income.

If your student debt is massive, you're not going to bring it down enough in 3 years (I'll explain why 3 years is a significant timeframe) to make a substantial impact on your crappy debt-to-income ratio.  Of course you can help yourself by paying down other, more manageable debts like your car and credit cards.  But the goal here is to attack this challenge from the other end.

When you complete a home loan application, you'll have to declare your income.  This will be your first hurdle.  If it's high enough for the amount of financing you need, you'll be asked to produce evidence.  The evidence comes in the form of 3 years of W2's and Tax returns.  It's a complete pain in the behind, having to PDF or scan your "income" documents.  Hopefully your tax person sent these documents in some sort of e-file.

If you happen to have a job paying the median U.S. income, around $59K, and you want to buy an "average" home in the U.S. (around $200K) you better have very little debt.  If you're reading this because you're saddled with student debt, then your only option is to work a second, part-time job that pays you by the book, i.e., no cash!  Your part-time employer must provide you with a W2 at the end of each year.  (You could also get a higher paying full-time job via the promotion route, or quit and climb the corporate ladder elsewhere).

Yes, it sucks to have to work a part-time along with your full-time.  It's a sacrifice you'll have to make as a highly indebted person, at least for three years.  Lenders look for a track record on your income, so don't go quitting and job hopping with that part-time gig.  Stay with the same employers for three straight years!  Once you qualify, sign the contract, are given the keys, and get your first home, you can re-evaluate whether or not you need to continue working the part-time job.


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Tip 2: Fix your credit!

Use your credit cards wisely.  Pay off your debts.  Don't go over your limits.  And on and on.  You can Google how to increase your credit score and have a bunch of free articles at your disposal instantly.  Have fun reading!

Tip 3: Down Payment, Save Like Your Kid Needs A Surgery And You Don't Have Insurance

If you focus more on making more income, paying the minimum on your student debt (provided you pay into both principal and interest), and being seriously frugal, you'll be able to save substantially more than ever before.  The down payment is the easiest challenge to solve out of the three.  Stop eating out and buying pricey coffee, shop at Thrift stores for clothes, at Dollar Stores for food, kitchen, and bathroom items, track all expenses, and so on.  Watch the movie John Q, starring Denzel Washington, for inspiration. 

The solution to your debt problems isn't paying down debts at a normal clip.  This will take you years and prevent you from buying your first home.  Clearly, it's a matter of being creative and taking assertive action to MAKE MORE MONEY!  Stop whining about how bad you have it.  Stop living in the past, wishing you'd never gone to college and spent all that borrowed money irresponsibly.  Move your ass!

On a lighter note...thanks for being here!  Until next time.

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