Due to the rising cost of a college tuition, more and more people are graduating with as much as 6 figures of student loan debt. Putting money toward debt first is a smart financial decision because every day the debt accumulates even more interest. These new graduates are putting off getting married, having children and even buying a home in order to pay down their student loans more quickly.
But it doesn't have to be this way. Many people successfully pay off their student loans while saving for a home. What are some of the ways that people have achieved these two financial goals simultaneously?
1. Consider Your Debt-To-Income Ratio
This number is used by banks to determine whether or not you are a good candidate to take on even more debt. Typically, you are in good shape if your debt-to-income ratio is less than 40 percent. Calculate your debt-to-income ratio by adding up all of your monthly payments (auto loan, student loans, rent) and divide that number by your total monthly income. If your debt-to-income ratio is very high, you will definitely need to consider paying down your debt before you apply for a mortgage.
2. Make a Realistic Plan with a Reasonable Timeline
Saving up a down payment for a home is not an easy task, and splitting your money between student loans and home savings can make it an even morere daunting process. Try to decide how much money you can realistically dedicate to savings and debt repayment. Also, look at homes prices in an area where you might want to purchase a home. This will help to give you an idea of how much money you will need to save for your down payment.
3. Come Up with a Graduated Savings Plan
The next step is to come up with a monthly savings plan to achieve your goals. Consider using a graduated savings plan where you start out dedicating more money to your student loans than your home savings fund. As your loan balances start to shrink, you can slowly move towards saving more money for your home and putting less money towards your student loans. Early on, you might want to put 90 percent of your discretionary income toward student loans and 10 percent toward your future down payment. By the 3rd year, you might shift to a 50/50 split. By year 5, you might be close to paying off your debt and achieving your goal of buying a home.
Once you have saved enough for a down payment and finished paying off your student loans, you will be well on your way to homeownership.
4. Speak with a Mortgage Lender and Find a Great Realtor
You will need to speak with a mortgage lender to get a pre-approval for a loan and to be sure you understand all the costs associated with purchasing a home. Without a current pre-approval you won't be able to make an offer on a home when you find one you like. Your Realtor can help you find a lender and will explain the buying process in your area, discuss market conditions, and guide you through the transaction so you can buy a place of your own!