Being in debt when you want to buy a house can be overwhelming. After all, you know it’s going to be tough getting money out of a bank. For starters, even if you get past the security guard, you’ve all those security cameras …
OK, hopefully you aren’t feeling that desperate. And you shouldn’t. Many people can buy a house if they’re carrying debt. But should you buy a house if you’re carrying debt?
The answer is yes.
Unless it’s no.
Look, everybody’s financial situation is different. Buying a house when you’re in debt may be a perfectly smart idea for you and the dumbest thing ever for someone else. Which is why if you’re living with debt and would also like to live in a house or perhaps a nice condominium, you’ve got some issues to mull over.
The debt, obviously
How much do you owe? If you’ve got a few years to go before you pay off your car but you’ve had no trouble with the payments and that’s all you owe, that’s clearly different from and far better than one in which you’re paying off a car, carrying $12,000 of revolving credit card debt and polishing off $76,000 in student loans.
Generally, the federal qualified mortgage rule states that the safe maximum debt-to-income ratio is 43 percent, says Greg Palmieri, a certified financial planner at online lending company SoFi. That is, if you take out the mortgage, the debt you pay every month — the house, car, credit cards and so on ― won’t be more than 43 percent of your income.
That said, Palmieri suggests there’s no need to push it. He says that while 43 percent DTI is the highest the government typically feels comfortable with, most lenders would rather see someone with no more than about 35 percent DTI. He would prefer even lower.
“As a financial planner, I would want to see someone at a much lower debt-to-income ratio. While the general rule of thumb is 35 percent debt-to-income ratio, I personally wouldn’t purchase a home with more than a 30 percent debt-to-income ratio,” he says.
But even then, Palmieri says there are some circumstances in which you can probably feel you’re making a good decision buying a house, even if your DTI ratio is higher than 30 or 35 percent. For instance, if you have student loans, you’ve had no trouble paying them off, they’re scheduled to be paid off within five years and you have a financial cushion in the bank (like three months’ living expenses after you make the down payment), he says you probably would be fine getting a house.
Bottom line: While it’s fine to have debt, the lower the percentage of your money that goes toward debt, the better.
You probably already know if this is a smart move or not
Many of us make or have made dumb financial decisions in our lives, so there’s no guarantee that listening to your gut is a good idea. And just a few paragraphs ago, you had that crazy idea of robbing a bank. But deep down inside, you probably know if this house buying decision is smart or not.
As David Carey, a vice president and residential lending manager at Tompkins Mahopac Bank, headquartered in Ithaca, New York, says, you are the person to decide if you can afford a home.
“Don’t leave this up to your mortgage lender,” he says. “Most lenders will responsibly process, underwrite and approve your mortgage, but they will never know your finances or lifestyle choices as well as you do.”
So think about your debt and where you are in life. You probably have a pretty good idea of whether buying a house is something you want to do but shouldn’t or if it’s something you want to do and actually can do.
Do you feel your debt is under control?
This goes back to knowing your situation. But if you really aren’t sure and think you could handle buying a home despite your debt, ask yourself whether your debt is manageable, suggests Kyle Winkfield, a managing partner at OWRS Firm, a wealth management and retirement planning company in Washington, D.C.
“If you are comfortably meeting all of your monthly financial obligations without stress or hardship, you might be in a good position for a larger commitment. That would include comfortably managing current debt payments, perhaps in the form of a car or student loan or small credit card balance,” he says.
It’s even better, Winkfield says, if you’re already putting money away in a savings and retirement account.
“That demonstrates that despite having some debt, you’re in control of it, and it isn’t controlling you. That’s an important factor when deciding how much debt is too much ― who is in control?”
He says that if your debt is running your life and your financial decisions are often limited because of all your debt, then, obviously, there’s your answer: Don’t make your debt worse with a home loan.
But don’t get too hung up on numbers, Winkfield suggests. “What might be a stressful debt load for one person can seem like nothing to another person,” he says.
Have you crunched the numbers?
If you haven’t started looking for a home, you can start looking online at places and get a sense for what type of home you might want to buy and how much it’ll cost you. There are online home buying calculators that can give you an idea how much you’ll pay and what you can afford.
What you don’t want to do is come up with a monthly mortgage payment that you can pay off every month, but just by the skin of your teeth.
“If you’re just barely able to afford the monthly mortgage payment, you’re not ready,” Winkfield says.
Sure, you may make the numbers work, but for how long?
“This is why many homeowners can end up cash strapped, in foreclosure, behind on HOA payments and so on,” he says. “Homes are an expensive purchase, and they consistently cost money to maintain, so if you enter that sort of commitment already saddled with debt, you might be making your situation worse overnight.”
And Carey points out that it’s not only the mortgage payment that you have to think about but also all the costs that come with owning a home.
“Things like electric bills, cable, natural gas, public water, sewer, homeowner’s insurance, home heating oil, rubbish removal and internet service are typically new expenses for a first-time home buyer and can often be overlooked when establishing a budget,” he says, adding that most lenders aren’t considering any of that when deciding if you qualify for a mortgage loan.
That’s why you need to rely on yourself to make this decision to buy a home rather than decide that if a lender will give you the money for a house, you must be able to afford it.
How do you feel about debt?
That may be the most important question you can ask yourself. If debt freaks you out, maybe you are better off staying put and not buying a home. But Winkfield points out that a student loan may take 20 years to pay off completely.
“And if you wait to purchase a home until after that debt is eradicated, you may have lost 20 years of great interest rates, mortgage tax advantages, the opportunity to build equity and some of the intangible benefits that come with homeownership,” he says.
He also points out that not all debt is created equal and that lenders recognize that. So yes, try to kill off that $12,000 in high-interest revolving credit card debt. Besides, eliminating that should improve your credit score and get you a lower interest rate, which will save you money on your loan. But your student loans probably aren’t going to demolish your credit score or make you look like a terrible risk in the eyes of a lender, according to Winkfield.
“A high credit card balance is looked at differently than a student loan for that master’s degree,” he says.
CORRECTION: A previous version of this story misstated the city in which Tompkins Mahopac Bank is headquartered. It is based in Ithaca.