How Student Loans Dashed My Dreams of Buying a Home

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Courtesy: Jeff and Kelly Banks*The Banks' loans triggered a high debt-to-income ratio, preventing them from getting a mortgage.
By Jeff Banks*, as told to Camille Noe Pagán

In our Money Mic series, we hand over the podium to people with controversial views about money. These are their views, not ours, but we welcome your responses.

Today, one man explains why he and his wife have had to shelve their dreams of home ownership, thanks to being saddled with more than $260,000 in joint student loan debt
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As I was earning my master's in environmental management from Duke University, I knew that a large student loan bill loomed ahead. After all, I had borrowed a lot of money to cover tuition and other costs in graduate school, plus I still had undergraduate loans to pay off.

But I'd always been told that I should try to get the best education possible -- even if it came at a hefty price tag -- to set myself up for the future. I wanted to pursue a career in a highly specialized field, and Duke offered one of the best programs for it.

To me, it seemed worth the cost. So by the time I graduated in May 2011, I had accumulated about $160,000 in undergraduate and graduate student loans.

It was a lot of money, but I knew a lot of people who were in the same boat, including my now wife, Kelly, who was in the same grad program and left Duke with about $108,000 in student loans.

We knew that paying those amounts back would be a challenge, but neither one of us carried much "bad" debt -- I graduated with only about $1,000 in credit card debt, and Kelly had none -- so it wouldn't prevent us from meeting our future goals, right?

Wrong. And I didn't realize just how much of an impact that debt would have until we attempted to buy our first home.

First-Time Buyers in a Tough Market

The Banks' student loans triggered a too high debt-to-income ratio, preventing them from getting a mortgage.

The Banks' loans triggered a high debt-to-income ratio, preventing them from getting a mortgage.

A few months after graduation, Kelly and I relocated to Sacramento, California, because I found a contract position as a natural-resource specialist at the National Marine Fisheries Service. Kelly initially worked as an unpaid intern, then got a full-time, salaried position with the state as an environmental scientist about five months later. Combined, we made about $90,000.

To ease our way into paying down our loans, we took advantage of the six-month grace period and other deferment options available to us. Kelly deferred her loans for a year, after which she began an income-based repayment plan that started her loan payments at just under $500 a month. Because she works for the government, she also qualifies for the Public Service Loan Forgiveness program, which means her balances will be forgiven after 10 years, as long as she continues to make her minimum monthly payments on time.

I got a three-year forbearance on all my federal loans. But the forbearance period on the private loans I took out for my undergrad days was up, so I had to start paying those back to the tune of about $350 a month.

Together, our loan payments were a good chunk of change but manageable. And as we settled into our lives together and started planning for the future, Kelly and I decided that we wanted to buy a home as soon as we could.

%VIRTUAL-pullquote-That's when we made rookie mistake No. 2: believing that a pre-approval for a mortgage guaranteed we'd actually get a mortgage.%Kelly's parents, who didn't want us to "throw away" our money by renting, decided to help fast-track that goal by giving us $18,000 to put toward a down payment and moving costs. In November 2012 we began the hunt.

We didn't have issues getting pre-approved for a mortgage of up to $200,000. We intended to put only 5 percent down because we didn't want to use up all of our gift money, which meant we'd have to pay private mortgage insurance. But even with PMI, our potential mortgage payments would still be about the same as we were paying in rent, so we were OK with the added cost.

To say the market was competitive was an understatement. Home prices in Sacramento were heating up and investors were swooping in. Every time we'd put an offer down, someone would outbid us or offer all cash.

When one of our offers was finally accepted, we were ecstatic. We paid our earnest money and got as far as a home inspection -- only to discover that there were serious structural and electrical issues with the home. We decided to pull out of the offer, but we made a rookie home buyer mistake and signed away any contingencies that would have returned those funds to us. So the seller ended up keeping our earnest money.

The bad news was that we were out $2,500. The good news: Another one of our offers was accepted on a newer home that was in far better shape.

The Day Student Loans Sabotaged Our Dreams

We were ecstatic. Our luck had finally turned around, and the nine months we had spent checking out dozens of properties was finally paying off.

The house passed inspection, so we thought we were on our way to owning our first home. But then came time to get our mortgage. Since we were putting down less than 20 percent, we had to apply for a loan through the Federal Housing Administration. We didn't suspect there would be any issues, given that we had been pre-approved.

But that's when we made rookie mistake No. 2: believing that a pre-approval for a mortgage guaranteed we'd actually get a mortgage.

Apparently, the underwriters determined that our debt-to-income ratio was too high to get approved. While we knew we still had a lot of student loans to pay back, it hadn't raised any red flags before, so we weren't sure what was different now.

Then our loan officer explained: Because I was a contractor, they weren't counting my income, which made it seem like our household income was about half of what it actually was. On top of that, they calculated Kelly's monthly loan payment as if she were on a standard repayment plan, rather than on an income-based one.

That made her payments appear closer to $1,200 -- more than twice the $500 she was actually paying. We were told that banks often did that to account for the possibility that payments under an income-based repayment plan could shoot up every year, which could hurt a borrower's ability to pay the mortgage or be approved for future financing.

Our realtor suggested we try a different lender, but at that point we were drained. Kelly and I realized that even if we tried to buy a less-expensive home, we'd run into the same problem. We probably wouldn't be approved for a mortgage until we paid off more of our loans or started earning a lot more money.

Hitting the Pause Button on the American Dream

Kelly and I have since gotten married, and we're now renting in a part of Sacramento where we would have wanted to buy. We still want to own a home, but we're being patient. We've crunched some numbers, and, based on how much we think our income will go up over time, we think we can try again in about five years.

Ideally, we'd like to get closer to a 20 percent down payment, but realistically, we'll probably put down only 5 percent again. %VIRTUAL-pullquote-We want to be happy in our careers, own a home and have kids. You know, the American dream. But I can't help but think that obtaining that dream is no longer an option for those burdened by student loans.%Next time, however, we want to make sure we're fully qualified for a mortgage so we don't have to suffer a last-minute disappointment again. The wildcard is what my loans will be once my forbearance period is up. The rules for federal loan repayment seem to change a lot, so I don't know what options I'll have in the future for keeping those payments as low as possible.

We do have about $2,000 left of the gift money from Kelly's parents (the rest was eaten up by moving expenses, other costs for our new rental and some wedding expenses). Kelly diverts $50 a month from her paycheck into a high-yield savings account to further build up our future down payment. I also try to save about $50 a month.

She plans to boost that savings amount each time she receives a raise. And I'm hoping to find a non-contract, permanent position, which should help us when it comes time to apply for a mortgage again. We're trying to save in other ways too: We carpool every day, limit how much we eat out, and don't do many vacations.

We've never had dreams of being super wealthy. We just want the things that most people want -- to be happy in our careers, own a home and have kids someday. You know, the whole American dream. But I can't help but think that obtaining that dream is no longer an option for those of us burdened by student loans.

I don't want to make it sound like I regret attending the schools I did. School was where I met my wife, how I prepped to be competitive in my field, and where I met some of my closest friends. So I wouldn't change a thing about my education -- I just wish it hadn't cost so much.

My generation, especially, has been given mixed signals by society. We're told to attend the best schools we possibly can -- but then we're punished when we can't afford it.

*Names have been changed.

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How Student Loans Dashed My Dreams of Buying a Home
However responsible you plan to be in your 30s, there's one thing you simply can't make up for -- time. And when it comes to compounding interest, time is secret ingredient. Here's an example: If a 25-year-old saves $3,000 a year for 10 years in a retirement account, the $30,000 investment will grow to $472,000 by age 65. If a 35-year-old saves $3,000 a year for 30 years (a full 20 years longer), the $90,000 investment will only be worth $367,000 at age 65. The moral? Your money's ability to make money babies increases exponentially if you let compounding interest start doing its thing while you're still in your 20s.
Based on what you just read about compounding interest, it's a no-brainer that now is the time to start saving for retirement. If your company offers a 401(k) match, there's free money on the table, ready to be put toward your retirement each and every month. If your company doesn't offer retirement options or if you haven't yet settled into your career, another great retirement vehicle is a Roth individual retirement account. You can contribute up to $5,500 a year, and you can take the principal out at anytime with no penalty, if needed. The important thing is to put your money to work now so your 65-year-old self can retire comfortably later.
If you don't already know where your credit report stands, now is the time to make yourself aware. You can get a free credit report from each of the three credit bureaus once a year, and now is the time to make sure there are no mistakes on your report. If your score is lower than you realized or if you discover any inconsistencies or problems, you have a head start on sorting it all out.
Saving for a rainy day is essential, even if you're the luckiest person in town. As your responsibilities increase in your 30s, the possibility for unexpected costs goes up. And as your financial responsibilities increase, it could become more difficult to put away the money you'd need to get by for three to six months (a typical emergency fund amount). Preparing for a rainy day has to be done while the sun's out, and your 20s is just that time.
If you're one of the seven out of 10 college students who graduated with student loan debt, you might be approaching your 30s in the red. Student loans may have a low interest rate, but they cannot be forgiven in bankruptcy. And as you add a spouse, a mortgage and even children to your life, the ability to pay down your student loans may become more difficult or burdensome. If the extra money is there now, pay those loans down.
If, like us, you defied the marriage-age average and said "I do" before you hit 30, life insurance is something worth looking into. When you're young and healthy, the costs are incredibly low. And should anything happen to you, your spouse will be grateful for the sure financial footing going forward. Make sure you get enough to cover any outstanding debt (including mortgages), funeral expenses and enough to help your spouse get back on his or her feet.
While the average age of marriage is pushing 30, 44 percent of women have already had a baby by age 25. If you find yourself already in the throes of parenting, the time to start thinking about your baby's education is now. By saving while he or she is still young, the amount you'll have to contribute later will be significantly less. How? You guessed it -- compounding interest via a 529 college savings plan.
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