How much should we pay down our SLs before applying for a mortgage?

[Rikku]

Hey mortgage experts - mind if I pick your brains for a minute? We are thinking about buying our first home within the next couple of years and I have some general questions about timing, so that we can plan accordingly.

Our main concern is that we live in a high-cost area and we both still have SL debt, so we are concerned about whether our DTI ratio is too high to get approved for the amount that we'll need to borrow. I know we don't need to be completely debt-free to apply for a mortgage and that we could qualify for a lower amount, but we're not in a rush. We'd prefer to delay buying in that scenario until the SL debt is at a level that mortgage lenders think is reasonable. So my question is: How far should we plan to pay them down first? We'd likely be borrowing around $400K.

Here's our info, as of now:

Gross income: Me $90K, DH $70K (Mine will increase modestly from year to year, but nothing dramatic expected. He is still building his career, so large increases are possible as he moves up)

FICO scores: All above 760 (except for my TU, which is currently at 729 due to an inaccurate negative item that I've disputed - I expect it to go away)

SL debt: Me $40K, DH $70K

Car loans: Me $1400 left on lease, DH $27K (My lease is up in April 2014, so I'll have another one before the mortgage)

CCs: Nothing with a balance - not sure if available CLs are considered, but mine is $26K and DH's is $5K

We're planning to pay the SL debt down by about $20K a year until it is paid off. Given that our combined total is now around $110K, that puts us at 5.5 years to pay it all off. With our combined income, what should we pay it down to before applying for a mortgage for $400K? Thanks in advance for any advice offered!

[pdog661]

Hi,

Mortgage qualification is made by looking at your monthly income vs your monthly debt payments.  You can not go over 45% of this figure.  

Your monthly income is 13.3K.  You can have a total debt load, including mortgage, or 6K.   What are your monthly liabilities?  What would the taxes be on a 400K house in the area you wish to purchase?

Regarding the student loan, payingyourstudentloandownwillnotchangeyourmonthlydebttoincomeratiountiltheloanispaidinfull.  I am not aware of any student loans that will recalculate payments due to principle reduction.  I could be wrong though.......... 

[Rikku]

Thanks for the reply! I didn't realize that DTI is calculated by monthly expenses - that's good to know! I'll have to crunch those numbers. What is the best way to estimate the taxes we'd have to pay?

I guess I should clarify what I mean when I say 'pay down the student loans.' The student loan debt numbers that I gave above are the collective balances of multiple loans, not just one. So as we pay down the collective SL debt, we would be paying off individual loans and thus decreasing our monthly liabilities. So I guess I need to look at the minimum monthly payments for everything, add in the estimated mortgage payment, and make sure it is under 45%? If it's over 45% at present, then I need to look at my schedule of when we'll be paying off each loan to get the answer?

[Rikku]

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@pdog661 wrote:

Hi,

Mortgage qualification is made by looking at your monthly income vs your monthly debt payments.  You can not go over 45% of this figure.  

Your monthly income is 13.3K.  You can have a total debt load, including mortgage, or 6K.   What are your monthly liabilities?  What would the taxes be on a 400K house in the area you wish to purchase?

Regarding the student loan, payingyourstudentloandownwillnotchangeyourmonthlydebttoincomeratiountiltheloanispaidinfull.  I am not aware of any student loans that will recalculate payments due to principle reduction.  I could be wrong though.......... 

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Do they just count minimum payments when calculating DTI, or do they count what you ACTUALLY pay? I added up our minimum payments, which equal $2150 - but we typically pay more than that, since we're paying off our SLs.

So based on the 6K figure...it looks like we'll be able to qualify for the amount that we want to borrow with our current debt level? Mortgage, taxes, and insurance should be comparable or a little less than our current rent. On the high end, that would put us at about $4500 monthly including mortgage.

[StartingOver10]

They count the minimum payments, not what you actually pay.

Make sure you have accurate info on your taxes and insurance. Allow for MI if your LTV is >80% Real Estate Taxes, Insurance, MI and PI are included in your front end ratios. Your back end ratios include all items in the front end plus your debt payments (SL's, other installments and cc's)

[Rikku]

Cool - thanks! It looks like we have enough wiggle room that our DTI will be fine when we are ready to apply, especially as we start to pay off the SLs. We need some time to save for a downpayment, anyway, and some of the SLs will be gone by the time we've saved what we want to put down.

Excellent - it sounds like we're on the right track for now, and I'll reassess when we get closer!