Q. My wife and I have been saving money for a home down payment. We are in our early 30s and own a small condo but we want a larger home. We want to have at least 20 percent of $300,000. We have already saved $45,000 but my wife owes $35,000 in student loans. Should we pay off the loans and start all over with the savings?
A. We’re glad to hear your saving and that you’re thinking this through.
There are several items to consider.
First, a mortgage lender’s main concern when deciding how much to loan someone is whether the borrowers have the track record and ability to pay off the loan, said Nicholas Scheibner, a certified financial planner with Baron Financial Group in Fair Lawn.
He said the mortgage company will look at different ratios to determine your ability to pay off a loan, including a very important one – the debt-to-income ratio.
“They want to know your monthly debt payments versus how much you are earning in monthly net income,” he said. “This will come into play if your wife’s minimum payment on the student loan is high.”
Scheibner said the decision to pay off the student loan is also dependent on the rate of the loan. If the rate of the student loan is 5 percent or higher, it may make sense to work on paying it down faster, he said.
The best answer for you may be a balance of increasing the student loan payments and continuing to save for a home, but at a lower rate.
“You do not want to blow through your liquid cash and savings in case there is an emergency situation that comes up,” he said. “Many people in their 30s do have a mortgage and carry a student loan, so do not feel alone in this situation or that it can’t be done.”
Given that you already own a condo, there is no rush or deadline to make this decision.
Scheibner said you should use this time to get a better handle on the amount of mortgage you can afford with the student loan payment you can handle.
“Keep in mind, the mortgage company can sometimes approve you for a higher mortgage amount than you truly can afford, so start keeping a budget,” he said.
Also be aware that paying off the student loans could mean a temporary negative blip for your wife’s credit score.
And whatever you do, don’t put yourself in a position where you’ll have to choose between paying the student loan or the new, higher mortgage.
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