Can you still buy a home if you have student loan debt?

An Overview of Rising Dental School Debt

According to the American Student Dental Association (ASDA), 2017 dental students graduated with an average dental school debt of $287,331—an increase from years prior.

If historical trends continue, it is likely the debt load will continue to grow in both dental and medical school. Nothing ever gets cheaper, right?

Student loan debts are everywhere

Private Dental Schools vs. Public Dental Schools

Just like college, the amount of debt dental/medical students accumulates greatly depends on where they choose to attend school. On average, public schools offer lower tuition rates than private schools.

I know many times, college students trying to get into medical/dental school will apply to multiple schools and hope they’re accepted to any one of them. One recommendation would be to take some time to compare the financial differences between the schools you’re applying to.

Whenever I was applying both to dental school and then to a residency, the cost of tuition played a major factor. Some of the private schools with higher tuition rates were MUCH easier to get into than some of the lower cost public schools. I wanted to limit the amount of student loan debt I was going to have to repay so I kept my list short with only public schools.

Should You Buy A House With Student Loan Debt?

In the above video, Dave Ramsey recommended that the new dentist pay off his $480,000 of private school loans and continue renting BEFORE buying a house.

What do you think? In this situation, I would tend to lean more toward paying off the loans before acquiring more debt. I agree with Dave on most of the things he preaches and this is one of them.

Too many doctors complete training with loads of student loan debt that they keep around too long. I know a local pediatrician that still owed over $100,000 after practicing for 20 years!

I get it. Having an above average income tends to make one feel that having a couple of loans lying around is no big deal. Complacency sets in. Unfortunately, those loans start to multiply as doctors tend to want to keep up with the Joneses (and the Joneses are broke).

4 Reasons To Pay Off Your Student Loans Before Buying A Home

1) Your debt-to-income ratio is too high When lenders decide whether you qualify for a mortgage, they review how much of your monthly income is devoted to debt repayments, such as payments for:

• student loans

• vehicles

• credit card debt

The overall result is your debt-to-income ratio (DTI). This ratio further breaks down into:

• Front-end ratio: The percentage of your income consumed by mortgage expenses

• Back-end ratio: The percentage of your income consumed by all other debt

For the most part, lenders want potential homeowners to maintain a front-end ratio of no more than 28% and a back-end ratio no more than 36%.

For doctors and other high-income professionals, some lenders allow back-end ratios as high as 43%.

If your back-end DTI is roughly 30%+, it’s probably best to continue renting until you’ve paid down more debt.

Remember, as a doctor, lenders will tend to loan you more money. But just because you qualify for a loan doesn’t mean you should take one out.

2) You don’t have enough for a down payment A report from the National Association of Realtors revealed the typical home down payment is 6% or less for 60% of first-time home buyers.

Typically, if your down payment is less than 20%, then you’re required to pay private mortgage insurance (PMI). PMI can add 0.5 to 1% to your monthly mortgage payment.

If you purchase a home for $200,000, for example, then you could face an extra $83.32 to $166.64 each month in PMI.

What about doctor mortgage loans?

Here’s what the White Coat Investor has to say:

The definition of a doctor mortgage loan is one that:

• Does not charge PMI despite having a down payment of less than 20%

• Will close with a signed employment contract rather than pay stubs

• Only considers the payments of student loans (not the entire loan burden)

• Is not an FHA or VA loan

As a general rule, the rates and fees on these loans will be slightly higher than what you can get with a 20% down conventional mortgage. That’s the price you pay for the convenience of not having to meet conventional mortgage rules and for being able to use your down payment money to:

• pay off student loans

• max out retirement accounts

The terms are highly variable and include:

• 30 year fixed

• 15 year fixed

• 5/1 ARMs

• 7/1 ARMs

• 10/1 ARMs

3) You want to avoid being house poor We rented for over ten years while I was in training. After purchasing our first home, I had no idea the amount of additional recurring and sometimes unexpected expenses that homeownership brought along with it.

Besides regular maintenance costs, you must factor in other repair expenses such as:

• leaky roof

• the furnace breaks

• when the A/C unit goes caput

• painting

• when the wife wants new furniture!

A good way to avoid this is to have a buffer in your budget to absorb these additional costs and consider purchasing a home that is less than the amount you’re qualified to buy.

4) Because Dave says so If you’re an avid follower of Dave Ramsey and you agree with the mortgage advice he gave to the caller in the video above, then, by all means, pay them off.

Looking back, our marriage would have had much less stress early on if we had done it this way.

3 Reasons To Buy A Home When You Still Have Student Loan Debt

1) Your debt-to-income ratio is less than 28% If your front-end ratio (the percentage of your income consumed by mortgage expenses) is significantly less than 28 percent, then you should be in good shape to:

Consider obtaining a mortgage while being able to pay back your student loans aggressively.

2) You’ve saved up a LARGE down payment If you’ve been able to save up 20%+ for a down payment while accelerating your student loan payments, then you might be ready to take on a mortgage.

3) You have a student loan with a low monthly payment If your student loan payments are a little too high for you to comfortably afford a mortgage, you may be able to refinance or consolidate your student loans, which means you could qualify for a lower monthly payment.

Even if you can get it lower, make sure you consider the other advice mentioned above before purchasing a home.

Dave Ramsey Mortgage Advice

If you’re going to buy a home with a mortgage, you need to have the basics covered.

Here’s what Dave recommends:

• You’re completely debt-free.

• You have three to six months of expenses saved in an emergency fund.

• You’ve saved at least 20% for a down payment to avoid PMI payments.

How Much House Can I Afford?

Now that you’ve gotten a little Dave Ramsey mortgage advice, let’s take a look at how much house he recommends we can afford.

Calculate the Costs

If you’re married or soon to be, it’s important to get on the same page as your spouse. It’s extremely difficult to obtain financial freedom when one spouse isn’t on board with the other. Buying a home is no exception, it’s all about the numbers.

Here are the 4 steps Dave recommends when figuring on how much house you can afford.

Add up the monthly household income If you bring home $6,400 a month and your spouse makes $3,600 a month. Your total monthly take-home pay would be $10,000.

Don’t forget to add in any money from side-gigs too.

Multiply your monthly take-home pay by 25% to get your maximum mortgage payment. If you earn $10,000 a month, that means your monthly house payment should be no more than $2,500.

His housing rule of thumb is quite different than the recommendations you’ll find elsewhere.

Use Dave’s mortgage calculator to determine how much house you can afford. Here’s what his calculator determines a person or family can afford with:

• Home price of $600,000

• Down payment of 10%

• 15-year fixed mortgage

• Interest rate = 4.25%

• Private mortgage insurance (PMI) of $225 a month

• Property tax = $6,600 a year

• $846 in homeowners insurance cost

Sticking with our example of the family with an income of $10,000 a month, they couldn’t afford the above house as their recommended monthly mortgage payment should be no more than $2500 a month.

In the above example of a mortgage payment of about $5,000, that would mean you’d need take-home pay of $20,000 per month.

Dave has an alternative calculator where you can input your monthly take-home pay to obtain the calculation:

I actually like this one better as it also breaks down the home prices based on the amount of down payment you can make.

Remember that when you obtain a mortgage pre-approval, lenders will likely approve you for a loan amount with payments larger due to your above average income.

That may tempt you to take on more home than you should. Don’t just assume that just because the bank approved it, you can afford it. They are two very different things.

After gaining Dave Ramsey mortgage advice, how much house do you think someone can afford?

How to take control of your finances: 13 ways to get ahead

Set Financial Goals

Have you ever sat down and written out specific financial goals? A set of clearly-defined goals can help to provide you with direction and purpose that will impact all areas of your financial life.

Ideally, you should have short-term and long-term goals. Your short-term goals may involve things like paying off specific debts or building up savings. Long-term goals may involve your retirement plans or net worth milestones.

Your goals should be SMART—specific, measurable, and time-sensitive. Each goal should have a deadline or end date and you should be able to clearly determine if the goal was achieved or missed. For example, you could set a goal to pay off all of your student loan debt by a particular date.

Be sure that your goals reflect the things that are most important to you. Read the goals regularly to keep them on your mind and you’ll find that they stay at the forefront when you’re making decisions that will impact your finances.

Check Your Credit Report

Your credit score will impact things like:

• Your ability to qualify for a mortgage or loan

• Credit card applications

• The interest rate that you’ll pay on your debt

• Rental applications

• Job applications

With those types of implications, it’s easy to see that you’ll want to pay attention to your credit score.

You may be able to get your credit score for free through the online dashboard of your credit card, as some issuers are providing credit scores as a perk to cardholders. Another way to see your credit score for free is through a service like Credit Karma that offer basic credit monitoring and credit scores at no cost.

Although your credit score is important, it’s equally important to check your credit report, because the details of the report will determine your score. It’s a good habit to check your credit report periodically to make sure that there are no errors or inaccuracies that could be dragging down your score.

Check for things like payment history that isn’t correct, closed accounts that are still showing as open, or accounts that aren’t yours (as could be the case with identity theft). If you see anything that isn’t correct, you can file a dispute with the credit bureau that is reporting the inaccuracy. Taking a proactive approach will help you to identify problems quickly and get them resolved.

By law, you’re entitled to a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) every twelve months. You can go to AnnualCreditReport.com to get the free reports in a matter of a few minutes. You’ll have the choice of getting the reports from all three bureaus at once, or get one at a time and spread them out. If you do it one at a time, you can get one every four months, which is helpful for continually staying on top of your credit.

Create a Budget

A monthly budget will help to give you control over the way you’re using your money. Budgeting invokes negative feelings for a lot of people, but it doesn’t have to be a painful process.

Instead of looking at your budget as restrictive, view it as a tool that will help you to use your money for what matters most to you. Budgeting isn’t only about cutting back on spending. Your budget gives you control to use your money in the best way that you see fit. You get to determine your priorities and allocate your money in a way that ensures that you’ll have enough for your priorities.

Your goal with budgeting should be to cut back or minimize expenses in the areas that don’t matter as much to you so that you’ll have more for those things that do matter.

For example, your budgeting process may involve cutting back on things like food and clothes so you’ll have more money for travel.

Track Your Spending

Creating a budget is a great step, but how do you know that you’re actually sticking to your budget? The only way to know for sure is to track and categorize your expenses. Without tracking your spending, you’ll have no way of knowing how you’re actually spending your money.

Tracking expenses may sound like a tedious task, but it doesn’t have to be that difficult. Budgeting apps can even help to automate part of the process. If you don’t want to use an app, simply create your own spreadsheet and take a few minutes at the end of each day to record all of the money that you spent that day.

Compare your budget to your actual spending to be sure that you’re sticking to the budget. Make adjustments to the budget if needed.

Pay Down Debt

If you want to gain control of your finances, paying off debt should be one of your priorities. When you’re in debt, you lack control over your money because you’re forced into making payments on that debt each month.

Once the debt is eliminated, you’re free to use that money in any way that you choose. After your debt is paid off, you’ll be able to save and invest more or use the money for other things that are important to you.

Attacking consumer debt like credit card balances, student loans, car loans, and other personal loans should be a big part of your financial plan. When you’re creating your budget, you can minimize expenses and allocate as much as possible to paying down your debts.

Reduce Your Bills

Finding ways to save money on necessities will allow you to have more discretionary income you can use in any way that you please. Fortunately, there are a number of ways that you can reduce your monthly expenses in many budget categories with just a small amount of effort.

Here are a few examples:

• Cancel cable TV or go with a cheaper cable alternative

• Switch to a discount wireless phone provider

• Shop around for lower insurance premiums (Policygenius makes it easy to check rates)

• Lower utility expenses by switching providers (depending on where you live)

• Shop at discount grocery stores or buy generic products to spend less on food

You’ll notice a big impact whenever you’re able to reduce your ongoing expenses because you’ll be saving money each and every month. My wife and I were able to reduce our cell phone bill by switching to a discount provider several years ago. We saved $70 per month, which adds up to $840 over the course of a year! That’s big savings for one small change.

Cancel Unnecessary Subscriptions

Aside from the necessities that were covered in the previous point, subscriptions and memberships are other recurring expenses that can have a big impact on your budget.

Take a look at all of your monthly recurring expenses to see what subscriptions and memberships you’re paying on a regular basis. This can include things like magazine subscriptions, membership websites, gym memberships, subscription boxes, and more.

The subscriptions and memberships may not seem like a significant amount of money, but think of it on an annual basis instead of monthly. Make sure that all of your subscriptions are justified and you’re getting enough value to keep them. If not, cancel it or downgrade to a lower plan.

Start an Emergency Fund

Building an emergency fund is one of the first pieces of financial advice that you’ll get from most experts. It’s generally recommended that you have enough money in an emergency fund to cover at least 3-6 months of living expenses.

Hopefully, you won’t need to touch the money in your emergency fund, but unexpected events like the loss of a job, health emergencies, and family emergencies are an unfortunate reality of life, and it’s best to be prepared.

Having an emergency fund helps to give you control over your finances because you’ll be ready when something unexpected happens, and it won’t derail your financial plans. Without an emergency fund, you’ll be in a reactionary mode whenever something unexpected comes up, and it will impact your budget and your ability to control the way you use your money.

Make Savings Automatic

Automating your finances is one of the best things you can do because it removes or minimizes the chance that you’ll forget to save (plus it saves time).

There are a few different ways that you can automate your finances. First, you can set automatic contributions to a savings account or investment account. For example, you could set up an automatic transfer so $300 is taken from your checking account after every paycheck and deposited into a savings account.

Many of your investment accounts will also allow you to set up automatic contributions that will be taken from your checking account. You could use M1 Finance or a robo advisor like Betterment to easily manage your investments and then set up an automatic contribution for each month.

Minimize or Eliminate Fees

You may be charged fees for your banking or investment accounts, annual fees from credit cards, or fees that are paid to a financial advisor. Evaluate any fees that you’re paying to be sure that they’re justified.

You don’t necessarily need to avoid all fees, but you want to be careful to only pay fees that provide you with great value. For example, you may be willing to pay a $95 annual fee for a credit card that gives you significant perks that are worth well over $95.

Investment fees can significantly eat into the long-term returns of your investments. There are a number of good low-fee investment options like ETFs and mutual funds from companies like Vanguard and Fidelity.

Turn Your Existing Skills Into Extra Income

While reducing your expenses is a big part of improving your financial situation and taking control of your money, another option is to increase your income.

Starting a side hustle is a very realistic way to make extra money, and you probably already have some existing skills and experience that can be put to good use with a side hustle. While there are endless different side hustle possibilities, using your existing skills will give you the potential to start making money quickly and will put those skills to good use.

The specifics of your situation will depend on your skills, but here are a few examples:

• Start a photography business if you’re good with a camera

• Use your typing skills to work as a transcriptionist

• Create handmade goods that you can sell on Etsy

• Put your writing skills to use as a freelance writer

• Offer music lessons locally or online

The money that you make through a side hustle can be used towards your financial goals

Invest for the Future

Take control over your future by investing. Of course, there are plenty of different ways to invest but here are a few specific options:

• Contribute as much as possible to your 401(k) plan

• Open a Roth IRA

• Start investing in real estate

• Create an account with a robo advisor

Investing can be an intimidating subject if you’re just getting started, but it doesn’t have to be complicated. Investing in index funds is a simple approach that anyone can do. Another simple option is to use a three-fund portfolio.

If you’re looking for some direction, you could hire a financial advisor or use a robo advisor that will create a plan for you based on your own situation and your goals.

Draft a Will

Creating a will is not the most exciting thing, but it certainly does help to give you control over what will happen in certain circumstances. Drafting a will is especially important if you have a family.

Your will can dictate things like what happens to your assets and who will be responsible for your kids if you were to die. You can also set up a power of attorney to give someone else (like your spouse) certain capabilities in specific situations.

Without a will, you’re leaving a lot of important details up to chance or in the hands of the courts. It doesn’t take a lot of time, effort, or money to gain control over these details by creating a will.

What Is Bad Debt? [And Why It Matters]

Though the line between good and bad debt can get fuzzy, there are some things that differentiate the two.Taking on debt can be a helpful way to increase your earning potential, grow passive income, or otherwise invest in a financially stable future. Sometimes, it’s just necessary to protect your health or wellbeing. When managed responsibly, this good debt—like student loans and mortgages—can also help you improve your credit score.

In contrast, bad debt comes with high interest rates and doesn’t contribute to your bottom line in a positive way. Things like auto loans and credit card debt can be expensive to borrow and aren’t long-term investments.

Of course, there are a few gray areas and it may not always be clear whether debt is good or bad. If you’re thinking about taking out a loan for anything from minor necessities to a new car, take a careful look at your finances to determine whether it’s worth the risk.

What’s the Difference?

Though the line between good and bad debt can get fuzzy, there are some things that tend to differentiate the two. Things to consider when comparing good debt vs. bad debt include:

• Does the debt still make sense after considering the total cost of the loan? (Think: fees, principal, interest, and any lost investment opportunities)

• Along the same lines, is there a better way to spend or invest the money that will help you in the long term?

• Is this an investment that will produce long term yields or just a short term solution?

• Will you get more from the debt/expense than you put into it?

What is Considered Good Debt?

While some might argue there’s no such thing as good debt, taking out loans can still be a smart investment in your future. In general, good debt is that which increases your net worth or otherwise helps generate value. Good debt also typically comes with a lower interest rate than many types of bad debt. This means you can pay off the loan more quickly and at a lower overall cost than high-interest debt.

Keep in mind, though, that you should still try to keep even good debt to a minimum—especially if you have dreams of financial independence or early retirement.

Common types of good debt include:

Student Loans

Education costs—especially those related to postsecondary education—are generally classified as good debt. This is primarily because a degree, though expensive at the time, increases your long-term earning potential.

However, some degrees have a greater value than others. For example, Google offers affordable design and coding certificates that can land you a six-figure salary, while a $200,000 degree from a traditional college might limit the average student to substantially lower earnings. Don’t get me wrong—this doesn’t mean one degree is better than another. But from a debt perspective, it’s best to balance the cost of a degree against your likely earning potential.

Medical Debt

But keep in mind the difference between medically necessary treatment and more elective surgeries. Whether medical debt is good or bad will ultimately come down to your individual circumstances. But if you need to go into debt to afford a procedure that will save or improve your life, it’s a worthwhile investment.

Mortgages

A home mortgage is often the largest loan someone takes out in their lifetime. Though daunting, shouldering this debt can be an investment in both your present and your future. For this reason, home mortgages are generally classified as good debt. Likewise, debt associated with investment properties can put rent payments in your pocket each month while acting as a long-term investment—both signs of good debt.

Building equity in a home also gives borrowers access to a home equity line of credit (HELOC) or home equity loan, both of which can be responsible alternatives to more expensive forms of debt.

Buying a house can be an excellent way to invest in your future. But for some, renting may still be the best option—especially if you’re investing the money instead of saving for a down payment. As with other forms of debt, it’s always best to evaluate your individual circumstances before signing on the dotted line

Business Loans

Though never easy, starting a small business can be an incredibly lucrative investment in your financial and professional future. Plus, with more uncertainty in the job market than in recent history, owning your own business is one way to invest in yourself and limit your risk of getting laid off. And the numbers back that up—in the wake of COVID-19, applications for new businesses are increasing more than they have since 2007.

Business loans are considered good debt if they increase your earning potential or otherwise improve your bottom line. These loans can also reduce your reliance on an employer, and have the potential to lead to more robust and sustainable income.

Remember, however, that starting a business can still be a risky venture and your investment isn’t necessarily safe. When deciding whether to take out a business loan—and whether it will be more good debt than bad—stick with loans that will help you generate increased income for your business.

So What is Bad Debt Then?

Generally speaking, bad debt does not generate long-term income or otherwise increase your net worth. Often used to purchase goods or services that do not have lasting value, bad debt presents less investment potential than good debt. Oftentimes, bad debt is associated with financing clothes, cars, electronics, and other consumer goods and services that lose their value quickly. Plus, bad debt frequently comes with higher interest rates, making it harder and more expensive to pay off.

Auto Loans

Cars are one of the more famously depreciating assets because of their high upfront cost and rapid depreciation once driven off the lot. For this reason, financing for a new car is generally considered bad debt. What’s more, some auto loans come with high interest rates, especially for borrowers with a poor credit score or limited cash for a down payment.

Note that car loans can fall into a gray area, depending on the needs of the borrower. If you’re financing a sports car to use on the weekends, you’re likely dealing with bad debt. However, if you live in an area without public transportation or bikeable roads and need a car to get to your job, you can think of a modest car loan as an investment in your future success. In that case, just try to keep your interest rate low and buy a used car rather than a new model that will depreciate on day one. Additionally, once you do purchase the car, drive it until the wheels fall off —AKA get your use out of it! Avoid succumbing to lifestyle creep as much as possible.

Cash Advance Loans

Cash advance loans are bad debt because of their high interest rates, fees, and short payback periods.

If you’re feeling strapped for cash and are considering a payday loan, consider asking your employer for a paycheck advance, borrowing money from friends and family, or working with a local credit union to find lending terms that fit your needs.

Credit Cards

By the end of 2019, consumer credit card debt reached a record high of $829 billion, with the average American facing $6,194 in credit card debt. Unfortunately, credit card debt is generally classified as bad debt—especially when credit cards are used to pay for luxuries and other consumables that won’t improve your long-term finances.

This is because, like payday loans, credit card use can land you in a spiral of debt if you max them out or only make minimum monthly payments. And, as the interest builds up, it becomes more and more difficult to stay on top of those minimum payments. What’s worse, many people misuse credit cards in a way that can damage their credit profile, by missing payments or carrying a balance month-to-month.

However, in some—albeit limited—circumstances, credit cards can still be good debt. For example, using a 0% APR credit card to consolidate and pay down other debts can be a great way to save money on interest while simplifying payments and paying down balances. Likewise, if you’re paying your monthly balances off on-time and generating significant cash back or rewards, credit cards can put money in the bank.

The Gray Area

When evaluating what constitutes bad debt, remember that there is a gray area. The true cost—and value—of debt is likely different from person to person. Here are a few types of debt that may be good or bad, depending on the circumstances:

Consolidation loans.

Using a new loan to consolidate your other debts can be a great way to simplify payments, reduce your interest rate, and lower your monthly payments. However, if you don’t also change your approach to budgeting and money management, you may find yourself struggling to make payments.

Borrowing to invest.

Some people think that borrowing money at a low interest rate and investing it for a higher rate of return makes it good debt. And this can be true for experienced investors who are prepared to closely monitor their portfolio and accounts. However, if you don’t have experience with this type of borrowing, steer clear to protect your long-term financial health.

Borrowing against your 401(k).

Borrowing against your 401(k) can make a lot of sense under certain circumstances. After all, there’s no lender so you don’t have the risk of default. However, if you separate from employment, you have to pay the money back in full. Otherwise, it will be treated as a taxable distribution and you could be exposed to additional fees and penalties.

Final Thoughts

Debt often carries a negative connotation but some things qualify as good debt because they can actually help you grow financially. Buying a home, getting a degree, or investing in business or real estate can all be effective ways to expand your assets and grow your earning potential. To make the most of your cash, however, avoid bad debts—like credit cards and car loans—that can sap your financial resources without improving your bottom line.