So you’re out of college and now embarking on the next phase of life. If you’re like most young Americans, you’ve probably got more than a bit of student debt. You might now be thinking of buying your first home in NYC but are also concerned about those debts. Should you pay off your student debt first before purchasing a home? The answer, as with most financial questions is that it depends. Each situation is different and to help you decide here’s what you need to consider.
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Red Light: When you should wait
If you check most of these boxes, it’s probably better to wait.
Your debt-to-income ratio is too high
To qualify for a mortgage, a lender will review what percentage of your monthly income is devoted to debt payments. This is done by adding all your monthly payments (student loans, car loans, credit cards, etc.) and dividing that by your monthly income. This is called your debt-to-income ratio (DIR). If it’s 36% or higher, you should probably put off that home purchase until you’ve paid off more of your debts.
You can’t cover the 20% down payment
For purchasing a home in NYC, it’s recommended that you have at least 20% of the homes purchase price for the down payment. Depending on where in New York you want to settle for the average down payment will vary. If you can’t cover the 20% down payment using this calculator to factor in variables such as interest rates, maintenance costs, inflations rates, etc. if the price differential between the cost of homeownership and renting is better then it’s a good reason to buy with a down payment of less than 20%.
You’re not sure where you want to be in 10 years
With renting comes flexibility if you don’t see yourself as changing careers or moving to other cities in a few years, it makes little sense to buy a home now. However, if you are committed to staying several years or more, then you can gain much more from buying, even with student debt.
Green Light: When you should buy
If you passed the above, you should be good to go but first make sure you have the following.
You have an emergency fund
Homeownership comes with some risks which can’t be predicted. Unforeseen maintenance, an economic downturn or illness can destroy your ability to keep up with payments. Aim to have an emergency fund set aside for at least 3 to 6 months to cover expenses should anything unforeseen emergencies strike.
You could get more for your money
Besides building equity, owning a home can get you more for your money than renting. For instance, in Manhattan’s East Village this is the case within four years. But just a few blocks away in SoHo it would take 31 years before buying would make financial sense.
You have a low-interest student loan
Compared to other types of debt, student loans are usually the least harmful. The interest rates tend to be lower and allow for an extended repayment period. Meaning you won’t risk losing any personal collateral if you need to stop paying for a while.
As seen, having student debts doesn’t necessarily put the brakes on buying a home. Each person situation differs so make your decision based on your long-term goals and finances. However, if possible to pay off your student debt it would likely lead to a receiving a more favorable interest rate when securing mortgage financing.