Buying a house

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wildhaggis
Posts: 196
Joined: Sat Oct 15, 2011 1:47 pm

Buying a house

Postby wildhaggis » Wed Apr 01, 2015 1:17 pm

As may be evident from some of my prior posts, I left biglaw not too long ago for the usual reasons. I took some time to readjust to normal life and, after a short stretch, began to practice at a much smaller firm in the town I relocated to. All told, I couldn't be happier with my choice, though there are the typical financial tradeoffs.

Perhaps unsurprisingly, my current income is much less than my biglaw income. I saved quite a bit and paid a good amount toward my student loans, but I still have significant debt. When I made my decision to leave, I fully understood how this would affect my financial options in the future. That said, I know there are plenty of others in my shoes who have learned how to manage and be relatively normal, financially speaking.

From this standpoint, I want to talk specifically about purchasing a house with a relatively modest lawyer salary and substantial student loan debt. Do any posters have experience with this? I understand my life will be much more difficult in this regard given my past choices. I suppose I'm trying to figure out whether "much more difficult" actually means "impossible."

Thanks in advance for any input. Hopefully the above is enough to get the ball rolling on this topic.

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homestyle28
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Joined: Thu Jun 04, 2009 12:48 pm

Re: Buying a house

Postby homestyle28 » Wed Apr 01, 2015 1:20 pm

wildhaggis wrote:As may be evident from some of my prior posts, I left biglaw not too long ago for the usual reasons. I took some time to readjust to normal life and, after a short stretch, began to practice at a much smaller firm in the town I relocated to. All told, I couldn't be happier with my choice, though there are the typical financial tradeoffs.

Perhaps unsurprisingly, my current income is much less than my biglaw income. I saved quite a bit and paid a good amount toward my student loans, but I still have significant debt. When I made my decision to leave, I fully understood how this would affect my financial options in the future. That said, I know there are plenty of others in my shoes who have learned how to manage and be relatively normal, financially speaking.

From this standpoint, I want to talk specifically about purchasing a house with a relatively modest lawyer salary and substantial student loan debt. Do any posters have experience with this? I understand my life will be much more difficult in this regard given my past choices. I suppose I'm trying to figure out whether "much more difficult" actually means "impossible."

Thanks in advance for any input. Hopefully the above is enough to get the ball rolling on this topic.


The relevant factor is your monthly payment obligation, not the overall size of your debt. It's easy enough to go to bankrate.com or other sites and get an idea on what you'd likely be able to borrow.

exitoptions
Posts: 263
Joined: Wed Sep 26, 2012 8:58 am

Re: Buying a house

Postby exitoptions » Wed Apr 01, 2015 1:22 pm

wildhaggis wrote:As may be evident from some of my prior posts, I left biglaw not too long ago for the usual reasons. I took some time to readjust to normal life and, after a short stretch, began to practice at a much smaller firm in the town I relocated to. All told, I couldn't be happier with my choice, though there are the typical financial tradeoffs.

Perhaps unsurprisingly, my current income is much less than my biglaw income. I saved quite a bit and paid a good amount toward my student loans, but I still have significant debt. When I made my decision to leave, I fully understood how this would affect my financial options in the future. That said, I know there are plenty of others in my shoes who have learned how to manage and be relatively normal, financially speaking.

From this standpoint, I want to talk specifically about purchasing a house with a relatively modest lawyer salary and substantial student loan debt. Do any posters have experience with this? I understand my life will be much more difficult in this regard given my past choices. I suppose I'm trying to figure out whether "much more difficult" actually means "impossible."

Thanks in advance for any input. Hopefully the above is enough to get the ball rolling on this topic.


I did it while clerking after having been in big law for a bit. I essentially put my loans into PAYE status and then bought a reasonably priced condo in a less desirable neighborhood. I only did this because I thought (correctly) that the market conditions were favorable at the time to purchase a home. It depends a lot on where you are living and what kind of lifestyle you want to live. In many cases it makes more sense to rent and then invest any other extra income in securities.

ETA: My plan was either to go back to biglaw and pay a lot of my debt down with the bonus, or to go government route and get forgiveness. I don't think my plan would have been sustainable if I went private small-law.

wildhaggis
Posts: 196
Joined: Sat Oct 15, 2011 1:47 pm

Re: Buying a house

Postby wildhaggis » Wed Apr 01, 2015 1:26 pm

Got it. But wouldn't my poor debt-to-income ratio basically fuck me? I have a good amount of savings and have no issues paying my current bills while still tucking money away. Any mortgage I get (plus HOA, and whatever) would absolutely be less than the rent I pay presently, given the price range I'm looking at. This essentially translates to a higher-than-normal down payment, resulting in a smaller loan under which I pay significantly less than my current rent. My overall expenses would actually go down.

If that's all there is to it, then that's all there is to it. Maybe I'm wrong, but I didn't think it was that easy. Regardless of my current savings, expenses, income, and clear ability to pay, wouldn't simply having an ugly debt-to-income ratio be enough to sink me?

exitoptions
Posts: 263
Joined: Wed Sep 26, 2012 8:58 am

Re: Buying a house

Postby exitoptions » Wed Apr 01, 2015 1:31 pm

wildhaggis wrote:Got it. But wouldn't my poor debt-to-income ratio basically fuck me? I have a good amount of savings and have no issues paying my current bills while still tucking money away. Any mortgage I get (plus HOA, and whatever) would absolutely be less than the rent I pay presently, given the price range I'm looking at. This essentially translates to a higher-than-normal down payment, resulting in a smaller loan under which I pay significantly less than my current rent. My overall expenses would actually go down.

If that's all there is to it, then that's all there is to it. Maybe I'm wrong, but I didn't think it was that easy. Regardless of my current savings, expenses, income, and clear ability to pay, wouldn't simply having an ugly debt-to-income ratio be enough to sink me?


I doubt it. If you have decent credit and buy a reasonably priced home, you should still get approved for a mortgage. The banks tend to look at your monthly debt obligations, which is why putting the student loans into PAYE status is important, even if you decide to pay more that you need to to be in good standing. The bank is looking to see if you can make your monthly payments regularly, so I don't think it will disqualify you simply because you have a poor overall income/debt ratio.

It won't hurt (much) to try to get pre-approved and see what happens. I says "much" because you will take a hard-inquiry on your report which can reduce your FICO a bit.

I did essentially the same thing -- my mortgage and HOA dues came to around the same as my rent, so it makes sense to build the equity. In a situation where you have high debt and you end up paying more than it would otherwise cost you to rent, I would definitely think twice.
Last edited by exitoptions on Wed Apr 01, 2015 1:38 pm, edited 2 times in total.

exitoptions
Posts: 263
Joined: Wed Sep 26, 2012 8:58 am

Re: Buying a house

Postby exitoptions » Wed Apr 01, 2015 1:32 pm

Also worth noting from the bank's perspective is that student debt is actually quite flexible. You can generally get hardship deferrals and whatnot fairly easily, and thus continue to pay the mortgage loan. The bank can take your house, but can't take your JD, so people generally pay the mortgage first unless the house is deep underwater.

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kalvano
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Re: Buying a house

Postby kalvano » Wed Apr 01, 2015 1:36 pm

I'm looking for a new house right now, and all that mattered in the approval process was the amount of monthly payments owed versus monthly income.

wildhaggis
Posts: 196
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Re: Buying a house

Postby wildhaggis » Wed Apr 01, 2015 1:42 pm

Appreciate the response. What do you mean by "decent credit"? The only thing I have "against" me on my credit are student loans, which are all consolidated and all federal (nothing private). I've never been late or defaulted or anything. That said, for better or worse, I've always paid cash for my vehicles and have never been big on credit cards, so I presumably have both an absence of bad credit marks and an absence of typical "good" credit marks. I do know my score is good. Would this play any role?

Also, if I went the IBR route (or PAYE if it ever gets expanded), I'm assuming I'd only be taxed on the equity I've built up in the house at the point of forgiveness, correct? Assuming no other liabilities, of course. I ask this because the amount of assets exposed to debt forgiveness after 25 years is obviously a relevant consideration in making the decision to purchase a large asset.

exitoptions
Posts: 263
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Re: Buying a house

Postby exitoptions » Wed Apr 01, 2015 1:47 pm

wildhaggis wrote:Appreciate the response. What do you mean by "decent credit"? The only thing I have "against" me on my credit are student loans, which are all consolidated and all federal (nothing private). I've never been late or defaulted or anything. That said, for better or worse, I've always paid cash for my vehicles and have never been big on credit cards, so I presumably have both an absence of bad credit marks and an absence of typical "good" credit marks. I do know my score is good. Would this play any role?

Also, if I went the IBR route (or PAYE if it ever gets expanded), I'm assuming I'd only be taxed on the equity I've built up in the house at the point of forgiveness, correct? Assuming no other liabilities, of course. I ask this because the amount of assets exposed to debt forgiveness after 25 years is obviously a relevant consideration in making the decision to purchase a large asset.


If you don't have any credit history, you need to start building it now. Take out a credit card and start making a few purchases and paying them back regularly. I would say a decent credit score would be anywhere in the 700s. You can get a fair idea using creditkarma.com where you stand currently, but it sounds like you might have some work to do.

I don't know about the IBR-Tax-Bomb issue since I've refinanced, and it's not a concern for me. The issue is discussed extensively here: viewtopic.php?f=23&t=220025&hilit=Student+loans

Wipfelder
Posts: 395
Joined: Wed Jul 09, 2014 3:26 am

Re: Buying a house

Postby Wipfelder » Wed Apr 01, 2015 1:53 pm

You might look at a seller financed house as well, that can be a great way to get a loan. It may be possible to get a favorable deal on a five-year balloon, where you would probably have a chance to refinance with a bank at a better rate (assuming you keep your job and all). It's a legit way to get started with home ownership.

exitoptions
Posts: 263
Joined: Wed Sep 26, 2012 8:58 am

Re: Buying a house

Postby exitoptions » Wed Apr 01, 2015 1:55 pm

Wipfelder wrote:You might look at a seller financed house as well, that can be a great way to get a loan. It may be possible to get a favorable deal on a five-year balloon, where you would probably have a chance to refinance with a bank at a better rate (assuming you keep your job and all). It's a legit way to get started with home ownership.


Seems a bit risky. If the housing market tanks and you can't get anyone to refinance that balloon payment, you lose your house along with the down payment.

wildhaggis
Posts: 196
Joined: Sat Oct 15, 2011 1:47 pm

Re: Buying a house

Postby wildhaggis » Wed Apr 01, 2015 2:01 pm

exitoptions wrote:
wildhaggis wrote:Appreciate the response. What do you mean by "decent credit"? The only thing I have "against" me on my credit are student loans, which are all consolidated and all federal (nothing private). I've never been late or defaulted or anything. That said, for better or worse, I've always paid cash for my vehicles and have never been big on credit cards, so I presumably have both an absence of bad credit marks and an absence of typical "good" credit marks. I do know my score is good. Would this play any role?

Also, if I went the IBR route (or PAYE if it ever gets expanded), I'm assuming I'd only be taxed on the equity I've built up in the house at the point of forgiveness, correct? Assuming no other liabilities, of course. I ask this because the amount of assets exposed to debt forgiveness after 25 years is obviously a relevant consideration in making the decision to purchase a large asset.


If you don't have any credit history, you need to start building it now. Take out a credit card and start making a few purchases and paying them back regularly. I would say a decent credit score would be anywhere in the 700s. You can get a fair idea using creditkarma.com where you stand currently, but it sounds like you might have some work to do.

I don't know about the IBR-Tax-Bomb issue since I've refinanced, and it's not a concern for me. The issue is discussed extensively here: http://www.top-law-schools.com/forums/v ... dent+loans


Thanks for the link. I know credit-wise I'm floating somewhere around 720-730. Maybe not having any active credit cards at the moment is screwing me, though.

exitoptions
Posts: 263
Joined: Wed Sep 26, 2012 8:58 am

Re: Buying a house

Postby exitoptions » Wed Apr 01, 2015 2:05 pm

wildhaggis wrote:Thanks for the link. I know credit-wise I'm floating somewhere around 720-730. Maybe not having any active credit cards at the moment is screwing me, though.


Honestly, I don't know why anyone wouldn't use credit cards. They offer far better protection/security and the good ones pay you to use them. I use mine essentially as a debit card -- pay them off completely every month -- but I make a few hundred bucks a year in cash back. Plus, as you've noted, it builds your credit because banks know you can use revolving debt responsibly.

WhiskeynCoke
Posts: 372
Joined: Tue Jul 03, 2012 1:12 am

Re: Buying a house

Postby WhiskeynCoke » Wed Apr 01, 2015 2:39 pm

exitoptions wrote:
wildhaggis wrote:Thanks for the link. I know credit-wise I'm floating somewhere around 720-730. Maybe not having any active credit cards at the moment is screwing me, though.


Honestly, I don't know why anyone wouldn't use credit cards. They offer far better protection/security and the good ones pay you to use them. I use mine essentially as a debit card -- pay them off completely every month -- but I make a few hundred bucks a year in cash back. Plus, as you've noted, it builds your credit because banks know you can use revolving debt responsibly.


This is spot on.

OP, get a couple credit cards, use them, and pay them off in full every month. You are essentially getting a free 1-2month loan this way, along with all the "points" and security benefits. If you understand the time value of money, it's too good to pass up. There are literally no downsides to this.

The one important thing is to make sure you keep your available credit to total credit ratio down. Opinions vary on this, but I've commonly heard that using under 20% is optimal. In other words, if your credit card max is $10k, try to keep your balance below $2k. This will help your score increase faster and get you better borrowing rates.

I always hated credit cards as a teenager because I never wanted to "spend money I didn't have." This was an incredibly misguided view because building your credit score is absolutely vital to your financial well-being down the road.

Good luck OP.




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