Student loan, mortgage, or both?

Staci

In November, a Student LoanDown reader, Karen, asked this really smart question:

Hi, I am a prospective student looking to return to school to get my degree. My situation is this: I am married with two small children. We rent but would like to soon buy a home. I'm concerned with how taking out student loans would effect my husband's and my chance of buying a house. I need some advice as to whether or not it would be smarter to buy a house first and put off my education, or go ahead and return to school.

Well, I've already owned up to the fact that my response to Karen's inquiry is less than prompt. And I'm not an expert on mortgage qualification, but I went to one who is: Jason Menke, one of my counterparts at Wells Fargo Home Mortgage. I hope Karen will think it was worth the wait. Here's what Jason had to say:

While they may be the most significant debt loads you'll ever take on, most experts agree student loans and mortgages are good debts to take on. Education can significantly improve your lifetime earning potential, and well-maintained homes are likely to appreciate in value over the long term. But as with any financial resource, these are loans that must be properly managed in order for them to work for you instead of against you.

People with student loans buy homes every day, so it's not a debt that necessarily acts as a barrier for people who want to become homeowners. Most of these borrowers, however, are in a position where they've already received their education and are employed full time, which makes your situation a bit different.

For the sake of this discussion, we'll assume you're going back to school with the goal of boosting your income via a marketable degree. (If you're studying ancient Mesopotamian paper making , all bets are off!) We'll also assume that you're currently a stay-at-home mother who wants to go to school full time. While your current household income wouldn't drop based on your decision to go back to school, you may have new expenses—such as childcare and commuting—that will impact your monthly budget. We'll also need to assume your husband's employment outlook for the next several years is fairly stable. Job losses do happen, and if your sole source of income suddenly goes away for six months, will you be in a position to continue to make rent or (presumably larger) house payments?

When applying for a mortgage, a lender looks at a variety of factors when deciding whether to approve you. To keep this simple, we'll assume you've got a good credit score, and you don't have past credit issues. Two other factors your mortgage lender will consider will be your current debt-to-income ratio (what comes in every month compared to what goes out) and your future earning potential. Although we're already assuming your degree will positively impact your future earning potential, determining how your student loans will factor into your debt ratios, all I can say is, "It depends."

Every mortgage lender has different programs and guidelines, and every consumer has a unique financial situation, so every mortgage loan is going to be tailored to that customer. Whether or how your student loans are factored into the equation depend on the lender and the type of loan you apply for (prime or non-prime, conventional or jumbo, fixed-rate or adjustable). =

The real issue for you and your family is: How much debt are you comfortable taking on without the benefit of your second income? In 10 years—when you're making a six-figure salary and have that corner office—a $1,500 monthly mortgage payment may seem a paltry sum, but it can be a fortune those first few years while you're going to school and relying only on your husband's income. So make sure you can afford your mortgage payments now—regardless of whether you decide to go to school or not.

Most real estate and mortgage experts agree that conditions are incredibly favorable for first-time buyers right now. Interest rates are still among the lowest they've been in 30 years, there's a strong supply of homes in many markets, and homes in many "hot" real estate markets aren't appreciating as quickly, keeping prices in check. First-timers are a seller's dream, because they can typically move in more quickly and they don't have to worry about selling the home they're currently in.

If you decide to go down the path of homeownership, do yourself a favor and get pre-approved (not prequalified—there's a difference!) from a reputable mortgage lender first. Your lender can help you determine what you can afford and help you better target homes in your price range. There's nothing worse than falling in love with a home and then finding out you can't afford it. This way, you'll avoid the temptation to overextend yourself financially.

In short, student loans won't necessarily prevent you from buying a home—especially if your educational endeavors will likely lead to increased income. Just make sure you're ready, able, and comfortable taking on all of these financial obligations at once.

Here's one option I'd like to throw out there for your consideration: If you're looking to work in a specific field once you obtain your degree, why not try to get an entry-level job at a company in that industry now? The extra income can help you save for the down payment on your first home, and many companies provide tuition reimbursement benefits for their employees who seek to further their education. It may take you a bit longer, but you'd reduce your need to assume debt for your education, and many companies highly value the expertise of employees who have "worked their way up" and now have a degree.

Sound advice all around, Jason. Thanks for sharing.

For more information, check out these great homebuying tools. Or, feel free to ask questions here.