Buying a home, with debt

In this country, there has always been a well-worn path to household wealth—and that’s buying the house itself.

Since the 2008 recession, the home is “still the major source of stable wealth” in this country, says J.P. Krahel, an accounting professor at Loyola University Maryland’s Sellinger School of Business and Management. The problem is not everyone can afford to buy a house these days.

Why not? The big reason is student debt.

Krahel, who graduated from Rutgers University with a Ph.D and six figures of debt, knows firsthand about this. His unpaid student loans were hurting his credit rating and made him a bad risk, in a bank’s eyes, for borrowing money. His solution was to refinance his student debt to pay it off more quickly and also to take advantage of a Federal Housing Administration program that required only a 3 percent down payment to purchase a home.

The result: Krahel is now a homeowner, here in Baltimore.

“If you’re paying rent, you’re helping someone else get rich,” Krahel says. “It’s better for society to have more people in homes.”

Here’s the bad news: College costs are not going down anytime soon, Krahel says. American wages have fallen and things cost more these days – not necessarily big ticket items, such as TVs and iPhones, but necessities like toothpaste are pricier than they used to be, he says.

“Buying butter is more expensive now,” he says.

In other words, the situation is not going to improve tomorrow and consumers have to educate themselves about resources that can help them, Krahel believes. Two that he recommends for families with high student debt: SoFi, an online lending start-up, and Earnest, another online low-interest loan provider.

Planning is key, agrees Patrick Johnson, an independent financial planner based in Baltimore. Anyone who wants to buy a home should know his or her credit score and also should get pre-approved for a loan.

“But the angle I would look at first is the student loan,” Johnson says.

Check with your loan provider, a financial planner or online for income-based repayment plans and loan forgiveness plans.

Know your household budget as well. It is “challenging, but possible” to pay down student debt and own a home. But “unless you’re making big bucks, you will have to cut back somewhere,” Johnson says, adding that a house payment should be no more than 33 percent of household income.

All those tips are great advice, agrees Matthew Heckles, the assistant secretary of the Maryland Department of Housing and Community Development, particularly this year when there are 15 percent fewer homes on the market. More than ever, new buyers may need down payment assistance to be competitive, he says.

The agency offers a few programs to help with that:

• SmartBuy—Launched in November 2016, this program has been getting a lot of press and provides first-time buyers up to 15% of the home purchase price to pay off the outstanding student debt when they buy a housing department-owned property. The program hopes to help 50 first-time buyers in the first year. http://mmp.maryland.gov/Pages/SmartBuy/

• You’ve Earned It—This program offers down payment assistance and a discounted mortgage rate for first-time buyers who purchase a house in one of the department’s “sustainable communities,” including Baltimore, Catonsville, Towson, Ellicott City, Westminster and more areas across the state. http://mmp.maryland.gov/EarnedIt/

Krahel wonders if new buyers “are too ashamed or too overwhelmed to ask for help.” But once they do, he says, they will discover a great number of resources that can help families meet their financial goals.

 

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