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Which loan to pay off first?

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New Member

Which loan to pay off first?

Hello everyone,

I've searched a few post and saw I'm not alone with trying to get a mortgage with student loans. I was recently denied because of my DTI. (I'm in a loan forgiveness program as well as IBR, which makes my payments $0. I'm learning this doesn't matter). I've been told by a loan officer to pay down my student loans, but of course if I pay them down then I won't have money for 20% down payment. If I put less than 20 then of course there's PMI, which would be more than my SL payment. (See how ridiculous this is getting). Before I rant, here's the questions and a few details.

Undergrad and grad loans total to 45k. My two loans from grad is about 24k and the the 6 loans I have left for undergrad is roughly 19k (I paid off 4 already).

Is it better to pay off the old 6 accounts or my grad school account first? Does it look better to have 1 account with 20k or multiple accounts that total 20k? What looks better on the credit report? Those in the same situation, how did you obtain your mortgage loan?

Thank you!
Message 1 of 6
5 REPLIES 5
Super Contributor

Re: Which loan to pay off first?

 
Message 2 of 6
Super Contributor

Re: Which loan to pay off first?

Great questions.  Just so that folks can help you best here, can you clarify a few things for us?  You wrote:

 

Undergrad and grad loans total to 45k. My two loans from grad is about 24k and the the 6 loans I have left for undergrad is roughly 19k (I paid off 4 already).

 

(1)  I am assuming that these numbers refer to the amounts you currently owe, rather than the original amounts that the loans were for.  Is that right?

 

(2)  If it is the amount you currently owe, can you also tell us what the amounts the loans were for as well?  (A total figure is fine.)  I am just curious to see what your installment utilization is.

 

(3)  You mention that the total is 45, but you break that down into 24 and 19.  But 24 + 19 = 43.  Is one of those numbers a typo?

 

(4)  Are all of those loans at the same interest rate?

 

You might want to talk to some LO's from a few other lenders, just to see if they all have the same set of DTI concerns.  (And make sure they all understand that you are in a loan forgiveness program.)  If so, I'd just talk to them about whether they have a preference about what they want to you to do (pay off one big loan, pay off several smaller loans, etc.).  The "person" you are trying to make happy is the lender, not FICO.  FICO does not care about your DTI, and paying off your loans will not make your FICO score higher.   (indeed, when a person pays off a loan that is close to being already paid off, it can lower his score, but I doubt that's the case for you.)

Message 3 of 6
Super Contributor

Re: Which loan to pay off first?

PS.  One more thing to consider is whether you are sure you want to buy a house.  If you really are in a program that is committed to paying off all 45k of your SL debt (the forgiveness program), it may be worth thinking again before you cough up your own money to pay off any of that   The cost of that is quite high, when you consider the long range implications of what you could have used that money for -- e.g. putting into a Roth IRA, etc.

Message 4 of 6
New Member

Re: Which loan to pay off first?

Thanks for the response.

The 2k I didn't mention is the interest owed on the loans combined. My interest rate varies from 3.4 to 6.4. The 6.4 is the interest rate on my grad school loan which is 20k. It currently has 1k interest. My second grad school loan is for 4k.

My undergrad loans are 3.5k, 4.5k(2), 2k(3)

Here in NYC, it's actually cheaper to own than rent. The cheapest I've seen 1 bedroom apartments run for is around 1,600. Low income housing is somewhat of a joke. Example. A studio warrants a 28k to 38k income and a 1 bedroom is 43k-48k. If you fall in-between that, you don't qualify according to income guidlines. I've been rejected by a few for that reason. Although I would assume I could get a studio bc my slightly higher income guarantees I can afford the place, but nope. It's a waiting game to come across a place that fits your income, then another one because there is a lottery system.

A place I previously put a downpayment on had $564 for maintenance and my mortgage payment wouldve been around $350. But the coop board rejected me. I've also come across condos with about 700 for maintenance. (All in Westchester County)

I would definitely prefer to take advantage of loan forgiveness. However, 10 years (when the loan is completely forgiven) of paying 1600 in rent, is 192000 of a house I couldve owned, plus forgiven student loans. I haven't done the full math of how much I would save otherwise, but that's how I thought first going into the home buying process.
Message 5 of 6
Super Contributor

Re: Which loan to pay off first?

OK.  I still encourage you to sit down with another person who you trust and, as you say, do the math.  Work through all pros and cons.  Stuff like whether you plan to live in the house you biuy for a long time (many years) -- if you do then that is a point in favor of buying.  There's also the cost of repairs, insurance, etc. etc. 

 

But let's assume that you decide there's a strong ultimate advantage in buying (even if you lose, say, 20k in paying loans you would not need to if you rented).  Then I'd go by what I said earlier.  Run your situation by a number of mortgage lenders.  If they all say that they need you to pay off a lot of your loans, then it sounds like your desire to own means you will need to do that.  Ask the lenders for the details of what they want you to do. 

Message 6 of 6
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