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Renting is hideous, especially here in the San Francisco Bay Area. Back in the projects of Lexington, Virginia (true story), we were able to find two bedroom apartments for only $450 per month. Here? We're talking $1,100 for a crappy "junior one bedroom" apartment.
That's $13,100 per year. That's might-as-well-have-a-mortgage territory.
Except, there is this minor factor of student loan debt. Now, everyone's finances are different. Some of us have $1,000 per month student loan payments. Others are using IBR to delay the inevitable. Either way, student loan presents two major obstacles to home ownership: debt to income ratios and down payments.
Debt to Income
The simplest way to describe this is money coming in versus money going out. If you want to obtain financing on a house or a car, you'll need to minimize your required down payments on student loans, such as through Income Based Repayment or graduated payment plans. Bankrate has a calculator to help you estimate your DTI ratio, which is debt to gross monthly income.
Thirty-six or above is bad news for lenders, tantamount to a bad credit score.
This is even more difficult than gaming your DTI ratio through IBR. How does one save up fifteen to twenty percent of the purchase price of a home, especially in high cost-of-living areas like the Bay Area?
The short answer, besides begging family members, is that you don't. There are a few rare options for home loans that require low or no down payment, allowing you to fold the cost into the mortgage.
USDA Rural Development Loans
This is an especially tempting option, though don't expect urban life with the USDA. And despite the name, it is not for farms. These loans apply to existing homes or new construction, on plots of land smaller than ten acres, in underdeveloped (rural) areas. Think mountain areas or far flung suburbs, rather than downtown lofts.
USDA loans are also for low and moderate income individuals, so the credit and DTI criteria are a bit more forgiving, no mortgage insurance is required, and there is no down payment.
VA Loans and Navy Federal Credit Union
Both of these loans offer no down payment, no mortgage insurance, and low funding fees that can be rolled into the mortgage. Both are also, obviously, restricted to current and former members of the military. The NFCU option has lower funding fees than the VA, which varies its fees depending on whether the veteran was regular military, reserves, or National Guard.
Federal Housing Administration Loans
Not no, but low down payments. FHA loans require a minimum down payment of 3.5 percent, plus require an upfront premium of 1.75 percent of the mortgage amount, plus an annual premium of 1.25 percent -- a bit less than private mortgage insurance. Because these loans aren't restricted by geography or the military, FHA loans are the most popular option, with 15 percent of all home loans coming from FHA insured loans, according to BankRate.
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.