Financing a down payment & IBR with a Mortgage Forum

[Anonymous User]

So I have a $160K job lined up in Chicago, but plenty of debt to go with it. Between the summer stipend I don't anticipate using and my interest free advance, I'll be getting pretty close to a down payment for an FHA loan. I took out more Grad PLUS than I needed to so I could get rid of a smaller undergraduate loan with a crappy interest rate (didn't have a co-signer in ugrad), but the cash could also help towards that down payment. My gut tells me it would be stupid to do this and I should put together my down payment through other means, but I'd like to hear other opinions.

Also, does anyone know how mortgage lenders figure IBR into the 28/36 rule?

[gulcregret]

Lenders will figure your student loan payments into your monthly expenses to figure your income to debt ratio for the purpose of qualifying you for your maximum loan amount. Any loan expenses that are expected to be pain in the subsequent 12 months will be counted as monthly expenses. You will need to show that IBR will be in effect rather than the standard repayment. But at $160 annually, you may not qualify for IBR, that will depend on other factors such as total student loan debt, dependents, spousal income, etc.

FHA loans require at least 3.5% down, I believe, and there are limits on the amount you can borrow that vary by each county across the country. Chicago probably has an increased loan amount maximum. You can borrow closing costs as part of the total FHA insured loan. But you still need to get a lender to give you the money. Your credit score should be above 580 to qualify for the best FHA loan rates and amounts.

As for the idea of using a salary advance and PLUS loans for a down payment on a house, it's a risky strategy. Have you looked around for place you may want to buy? Condos are pretty cheap in Chicago and rowhouses in like Wrigleyville are pretty cheap too and a good value, or at least they were about 15 months ago when I last looked. Your proposition is to use PLUS loan funds with a roughly 8% interest rate to invest in a residential property. Personally, with how depressed the Chicago real estate market was/is, it may be worth it in that the property may increase at a better rate than the 8%, but if not, just pay the PLUS loans back and use the advance and summer stipend for living expenses and the down payment. I bet there are condos for like $200,000 on North Lakeshore that you could get. And you only need like $7K down.

[Anonymous User]

Lenders will figure your student loan payments into your monthly expenses to figure your income to debt ratio for the purpose of qualifying you for your maximum loan amount. Any loan expenses that are expected to be pain in the subsequent 12 months will be counted as monthly expenses. You will need to show that IBR will be in effect rather than the standard repayment. But at $160 annually, you may not qualify for IBR, that will depend on other factors such as total student loan debt, dependents, spousal income, etc.

FHA loans require at least 3.5% down, I believe, and there are limits on the amount you can borrow that vary by each county across the country. Chicago probably has an increased loan amount maximum. You can borrow closing costs as part of the total FHA insured loan. But you still need to get a lender to give you the money. Your credit score should be above 580 to qualify for the best FHA loan rates and amounts.

As for the idea of using a salary advance and PLUS loans for a down payment on a house, it's a risky strategy. Have you looked around for place you may want to buy? Condos are pretty cheap in Chicago and rowhouses in like Wrigleyville are pretty cheap too and a good value, or at least they were about 15 months ago when I last looked. Your proposition is to use PLUS loan funds with a roughly 8% interest rate to invest in a residential property. Personally, with how depressed the Chicago real estate market was/is, it may be worth it in that the property may increase at a better rate than the 8%, but if not, just pay the PLUS loans back and use the advance and summer stipend for living expenses and the down payment. I bet there are condos for like $200,000 on North Lakeshore that you could get. And you only need like $7K down.

OP here: This is exactly what I was thinking. I figured with closing costs and everything I would need 13K up front for a $250K condo with an FHA loan. I am mid ~700s for a credit score with good revolving and installment history, so I should be OK for the rate (I guessed around 4.5%?). Between my stipend and interest-free advance, I think I can go into August with about $7-8K. I might just try to hit up a relative for the difference.

This brings up another point though. Let's say 5-10 years down the line I have not yet paid off my student loans. Is there anything that would prevent me from taking out a home equity loan to pay off my student loans, take advantage of (hopefully) lower interest rates, and deduct the interest paid?

Ultimately, I just don't want to see this real estate opportunity disappear. I structured my budget to get out of debt in five years, but I would kick myself if I let sub-4% rates and ridiculously low home prices go to waste over some nominal amount of interest.

[sunynp]

Given the housing market, I wouldn't count having enough home equity in a few years to pay off your loans.

[Anonymous User]

Given the housing market, I wouldn't count having enough home equity in a few years to pay off your loans.

You mean to suggest you see further drops in the Chicago condo market? That would be hard for me to believe, but I would love to be convinced of this so I wouldn't feel so bad about passing up buying.

[sunynp]

How much of a rebound do you need in 5-10 years in order to have the equity you need to borrow? How much money are you expecting if you buy low now, how high do you expect it to go? Also note that you have to include property taxes, repairs, condo or co-op fees, etc. - so make sure you calculate what a your actual payment will be. Did you include loan origination fees, etc? If this is such a great deal, do you see it disappearing fast? How fast has it been recovering in Chicago? Will another year make a huge difference? I don't see much forecasting of interest rates increasing over the next few years, you might want to be sure you like your job and build up some savings before you buy real estate. You might want to be sure you can live on that restrictive budget for a while before you commit to this plan.

But I am very conservative, I know what happened to the people who were Lathamed or laid off or deferred. It was very difficult for them financially and most have not recovered. They would have lost their house too.

[SpiteFence]

I've basically used this to help me draw the conclusions I did: http://www.nytimes.com/interactive/busi ... lator.html.

I still anticipate that all else being equal, its still probably cheaper to buy. And the home interest deduction is legit too. I wish that tax credit was still around... I know being Lathemed is a possibility, but fortunately I'm in a pretty good DINK relationship, so that mitigates the risk.

[bdubs]

Given the housing market, I wouldn't count having enough home equity in a few years to pay off your loans.

You mean to suggest you see further drops in the Chicago condo market? That would be hard for me to believe, but I would love to be convinced of this so I wouldn't feel so bad about passing up buying.

I don't see it going down a lot, but I can see it being totally stagnant for 10 years. The main problem with Chicago condos is that they tend to have huge maintenance fees which are not deductible and will be factored into your mortgage financing equation.

Also, don't believe the newspaper headlines about sub-4% rates. As an FHA borrower you most likely won't be getting a rate that good, and you have to buy insurance from the FHA which just adds more on to the borrowing costs.

I would be really surprised if your "investment" was really a good one for something less than 10 years. Consider the fact that you will probably want to upgrade after 10 years anyway since you will more than likely have a family, SO, or just a greater desire for nice stuff. Once you move out and rent or sell, you no longer have any tax benefits from owning.

[gulcregret]

Definitely agree with most of what has been said. Five years from now, the Chicago market will not go down but it probably won't increase enough to leverage equity to pay off $60-80,000(?) in student loan debt either. And to echo some other comments, you will have high condo fees and have to pay probably $3K in insurance premiums for the FHA loan.

That said, buying real estate (assuming you keep it for a few years and stay in your job for the corresponding 3-5 years) will be a better investment than dumping $1800-$2500 a month in rent away. Check out some townhouses or rowhouses up on the north side also. Because you have another income and no kids (yet?), you can easily get a $400K mortgage insured by FHA, but you may need to be at your job for at least a year first (plus you could save for the downpayment). I'm going to be in a similar situation, although not making as much because I'm working for the Gov, and I want to purchase real estate in DC but am running into problems getting qualified due to no income history for the previous few years. I have similar credit and spousal income also. Lenders are stingy right now so even if you qualify for FHA, it doesn't mean lenders will give you the money.

A better investment idea would be taking that money and putting it into a non-qualified annuity and getting a cheap place to live (rent) for a year. You can save a lot of money over a year when you are taking home $110K and paying less than $50K in loans and rent. Of course, you just have to save the money. For me, and I've had this debate on here before and with other people, I personally feel it is better to invest early than to make larger loan payments because of the compounding interest build-up that accumulates over those ten years that you pay the minimum loan payments.

[03121202698008]

In general, if you have to beg, borrow, and steal to meet the minimum requirements for a loan, there is a reason you don't qualify for the loan without doing so. This is a risky strategy. Many things could go wrong.

[Anonymous User]

Definitely agree with most of what has been said. Five years from now, the Chicago market will not go down but it probably won't increase enough to leverage equity to pay off $60-80,000(?) in student loan debt either. And to echo some other comments, you will have high condo fees and have to pay probably $3K in insurance premiums for the FHA loan.

That said, buying real estate (assuming you keep it for a few years and stay in your job for the corresponding 3-5 years) will be a better investment than dumping $1800-$2500 a month in rent away. Check out some townhouses or rowhouses up on the north side also. Because you have another income and no kids (yet?), you can easily get a $400K mortgage insured by FHA, but you may need to be at your job for at least a year first (plus you could save for the downpayment). I'm going to be in a similar situation, although not making as much because I'm working for the Gov, and I want to purchase real estate in DC but am running into problems getting qualified due to no income history for the previous few years. I have similar credit and spousal income also. Lenders are stingy right now so even if you qualify for FHA, it doesn't mean lenders will give you the money.

A better investment idea would be taking that money and putting it into a non-qualified annuity and getting a cheap place to live (rent) for a year. You can save a lot of money over a year when you are taking home $110K and paying less than $50K in loans and rent. Of course, you just have to save the money. For me, and I've had this debate on here before and with other people, I personally feel it is better to invest early than to make larger loan payments because of the compounding interest build-up that accumulates over those ten years that you pay the minimum loan payments.

Yea, I've been in some of financial discussions on here before. The eternal debate over what to do with cash when you have a 7.9% loans continues to go unanswered. I'm meeting with a financial planner soon to get his take on all this, because I just haven't received any consistent answer yet. I don't live and don't plan on living an expensive lifestyle, but for a nice apartment without a ridiculous commute the $1800-$2300 a month in rent is seemingly unavoidable, and it just sucks to think thats just money flushed away instead of building an asset. And even if I'm living small those first years, I would want to build up a cash reserve quickly so its hard to justify doing anything before I have at least 20K in cash.

And back on the real estate note, I like the north side, but I think I would be more likely to move earlier than if I lived in some other areas. For instance, Beverly has a suburb-like feel but is only 20 minute train ride from the loop. Plus, most of those places have parking included so that's 200-300 a month saved.

[sunynp]

My firm has a relationship with a private bank group of a major bank. You might be able to get some advice from a wealth management or bank advisor for free as a courtesy of being in the private banking group. You don't have to actually be wealthy (yet!)

[Riles246]

Yea, I've been in some of financial discussions on here before. The eternal debate over what to do with cash when you have a 7.9% loans continues to go unanswered. I'm meeting with a financial planner soon to get his take on all this, because I just haven't received any consistent answer yet. I don't live and don't plan on living an expensive lifestyle, but for a nice apartment without a ridiculous commute the $1800-$2300 a month in rent is seemingly unavoidable, and it just sucks to think thats just money flushed away instead of building an asset. And even if I'm living small those first years, I would want to build up a cash reserve quickly so its hard to justify doing anything before I have at least 20K in cash.

This "flushing away" vs. "building an asset" is a myth common to first time home buyers. It would be wise to avoid falling in to this trap. Ever since the crash, a large number of landlords have been renting their properties out at or below their variable costs for the year, meaning this is money that gets flushed away even though they own the place. Factor in the idea that for the first 15 years of your mortgage you are paying more interest than principal and you'll quickly see that you have no equity for many years. If you look at a mortgage amortization schedule, it is apparent that in the first 5 years or so very little of your payment actually goes toward principal.

If you factor in taxes, condo fees, mortgage interest, and closing costs that will have to be paid upon ultimate sale of the home, you'll see that you need to stay put for at least 7 years solely to break even on your home (source: a bunch of articles on rent vs. buy ITE). So that means that for the first 7 years, you are not building an asset, you are reducing a liability. Don't let the deductability of mortgage payments on your tax return fool you- you will still be paying thousands upon thousands in interest to the bank. If you look at a mortgage amortization schedule, it is apparent that in the first 5 years or so very little of your payment actually goes toward principal.

Per http://www.1728.org/mortpmts.htm, if you have a $280k loan at 4% (generous) for 30 years, by year 7 you've already paid the bank $112k but only have equity of $39k. Ok, so you've built $39k in equity, right? Not quite. You've also had to pay property taxes (estimated 5k/yr but probably more) of $35k, and you'll have to pay $16k in closing costs to sell it. Unless that condo goes up in value, you've actually lost money. And this ignores condo fees, repairs, and other ancillary expenses. Of course this ignores the cost of rent over those 7 years, but you can see that there is a lot of risk involved and that there is no such thing as a free lunch. Renting might beat buying or vice versa depending on the specifics, but they can be extremely close and it is too much of a simplification to look at it as building an asset vs flushing money away.