“[Graduates in debt] start out with an anchor that slows their progression toward future goals,” Ernie Almonte, chair of the AICPA’s National CPA Financial Literacy Commission, said in a statement. 41% of the more than 200 people (according to a survey from the American Institute of CPAs) said they have delayed saving for retirement, 40% have put off buying cars, and 29% have postponed home purchases.
There’s debate about whether buying a house is a good financial move. But the weakening of this coming-of-age ritual is a significant change in behavior for young adults in this country. Researchers at the Federal Reserve Bank of New York believe this decline could be from astonishing student debt levels for first-time buyers. So how do you know if your debt is hurting your chances of getting a mortgage? There are guidelines. The YI report focuses on two types of debt-to-income ratios that are taken into account when mortgage applications are evaluated:
- The “front-end” ratio divides all of your monthly housing costs (mortgage, homeowner’s insurance and real estate taxes) by the amount of money you earn before taxes.
- The “back-end type” is more comprehensive. It divides all of the said housing costs PLUS all of your other debt obligations (student loans, credit cards, auto loans, and so forth) by pretax income.
If purchasing a house is important to you, and if you’re one of the many who are unable to pass the above-mentioned debt-to-income tests, you have a couple of choices — either put up more money for the down payment or take the time to improve your standing.
Here’s how you can do that:
Start with your budget. Your goals should be to maximize income and minimize expenses. Taking income first, and whether a higher paying job or after-hours work is an option, know that lenders often take a pretty broad view of what constitutes “gross income.” After you know your income, eliminate any excess spending. Watch out for charges from credit cards, and make any other payments you have on time.
Next, refinance whatever debt you can. Start with all your higher-interest loans, such as for credit cards and personal lines of credit. Just be sure to factor the annual percentage rate (APR) into your decision making process.
Here’s a APR calculator for you: http://www.efunda.com/formulae/finance/apr_solver.cfm
Sell what you don’t need. Whether via Craigslist or eBay, reorganize your things. Then use the proceeds to pay down principal as opposed to making a few extra payments ahead of time. That’s because loan payments are comprised of principal and interest. Therefore, paying ahead will reward your lender at your expense. Afterward, consider refinancing your newly diminished balance to reduce the payments going forward.
We hope this gives you a new outlook to early home buying. Don’t get discouraged by weighing debts, but let them teach you to manage your money to build a better future.