I attended a BBQ with friends Saturday night and the conversation shifted to an acquaintance of ours with “massive” law school debt of $160,000 who wants to buy a nice home in one of Portland’s leafy, established, close-in neighborhoods.
My friends were still in the “shock and awe” phase of seeing a student loan debt load of $160,000 against a $40,000/yr salary. I’ve seen this many times before and it’s not as bad as it may seem. Trust me.
Federally backed student loans generally carry a very low interest rate, in between 3% to 4%. They offer 20-30 year repayment periods. And, the payments can be deferred pretty easily in a pinch.
The $40,000 starting salary is not permanent and will most likely increase over the coming years. Inflation will make that $950/mo twenty year payment look like the equivalent of $475/mo way out in 2027. (I realize there will be added expenses in the monthly budget coming from 2.3 children and all the costs of raising a family. All prices will rise, but most likely, the income of a first year attorney switching from non-profit to private practice with ten years of experience will outpace inflation).
The saving grace is that the attorney married a non-attorney who earns $80,000/yr and isn’t in debt from college.
So the big question was, “Can they qualify for a $400,000 home?”
Yes, they can qualify for a $400,000 home.
It’s probably going to be tight, but they will be able to qualify for a $400,000 home with a $380,000 mortgage.
Here’s the options I’d look at for them:
Fannie/Freddie 95% Financing
4.00% 30 YR FIXED
Up-front Mortgage Ins $5,700
Professionals 95% Purchase
No Mortgage Insurance
The Professionals Program, for Doctors, Attorneys, and CPAs, will have lower closing costs because the loan doesn’t require Mortgage Insurance (MI), whereas the Fannie/Freddie loan requires MI on any loan over 80% LTV.
With the Fannie/Freddie mortgage, I recommend buyers look into paying for MI up front rather than having MI attached to their monthly payment. Reason being is that single premium MI typically costs 1.5% of the loan balance, or in this case $5,700. Monthly MI could cost up to $350/mo, and would be required for a minimum of 60 payments ($21,000) or until the loan has reached 80% LTV, which could take 10 years ($42,000) if the market is flat. MI companies also don’t seek out homeowners to let them know they’ve hit 80% LTV.
Despite having $160,000 in student loan debt from law school, interest rates are low right now and it’s very realistic to think that our friends will be buying a $400,000 home in Portland in the very near future.