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Qualifying for a Mortgage when you have Student Loans

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According to studies, on average college graduates in 2017 walked away with more than $38,000 in student loan debt. Add on graduate, medical, or law school and it’s even more. After you land your first job, the next step may be to buy your first home. How do you start paying down your student loans, qualify for a mortgage, and start saving for a house downpayment all at the same time?

If you have Federal student loans, you may have elected an income-based repayment plan (IBR), which makes it challenging for mortgage lenders to assign a payment amount when calculating your debt to income ratio. This is because your monthly student loan payment could change each year depending on your income, or your loan could be deferred or in forbearance. Your debt-to-income ratio is an important factor in qualifying for a mortgage and is a way for lenders to estimate your ability to make your monthly mortgage payments. The lower the better. When it comes to payments made under an IBR, conventional and federally insured FHA loans have different guidelines for determining the borrower’s monthly payment obligation to be used in their debt to income calculation.

For a conventional loan, the borrower must use one of the following:

  • The student loan payment amount listed on the credit report.
  • 1% of the outstanding student loan balance.
  • The actual standard plan repayment amount reported on the credit report. Your credit report will always show your standard 10-year amount for “Amount Due”, not the amount you actually pay.
  • A calculated payment that will fully amortize the loan over the repayment period (this means that you have to calculate a payment with no forgiveness after 20/25 years).

For an FHA loan, the borrower must use the greater of:

  • 1% of the outstanding balance on the loan.
  • The monthly payment reported on the borrower’s credit report.
  • The actual documented payment, provided the payment will fully amortize the loan over its term.

The ability to save for a downpayment is another factor in determining if a borrower qualifies for a conventional loan or a FHA loan. Conventional loans typically require a minimum downpayment of 5% (10% for condominiums) while FHA loans can go as low as 3.5%. With both FHA and conventional loans, there are premium costs and monthly private mortgage insurance payments to consider. However, for individuals with large student loan balances, it raises the question: should borrowers focus more on paying down student loans or saving for a downpayment? In some cases (and against conventional wisdom) it may make sense to prioritize paying down student loans to take pressure off your debt to income ratio in lieu of targeting a higher downpayment.

If you are considering purchasing your first home but didn’t think it was achievable due to student loans, contact Sharkey, Howes & Javer to meet with a CERTIFIED FINANCIAL PLANNER™ to review your options and how to qualify for a mortgage that best fits your needs.

Inside the Economy: Detroit and Rare Earth Elements

By | Economic Discussion, Economy, Larry Howes, SH&J Blog | No Comments

On this week’s Inside the Economy with SH&J, we discuss the resurgence of the City of Detroit. Detroit is seeing real estate values increase for the first time since 2012. What caused this economic turnaround and are there additional municipalities that could look to the Motor City for inspiration? A fascinating discovery of rare earth elements was found on a tiny island in the South Pacific. What kind of implications could this have on the global economy? Tune into this week’s discussion to learn about these topics and more!

Health and Your Financial Fitness

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When you think about financial fitness, especially as you’re moving into your retirement years, you typically focus on big financial goals: paying down your debt, building up your savings account, and making sure that you have a retirement account that will support your lifestyle throughout the later years of your life. What many people fail to think about, however, is how your physical health has the potential to impact your financial wellness.

Medical Expenses Aren’t Cheap

Health emergencies are expensive. Having the proper insurance in place is extremely important. However, even with insurance, a short hospital stay can quickly rack up thousands of dollars in bills and surgery is even more expensive than that. In addition to copays and deductibles, you may find yourself dealing with out-of-pocket expenses for supplies and medications.

The Cost of Lost Work

A job that includes benefits, such as paid time off for illness and health insurance, can be very helpful in protecting your income during your working years. However, even with that paid time off, the cost of lost work can add up quickly. Depending on the illness, you may find that you’re less productive at work, which could mean that you may be overlooked for bonuses, special assignments, and promotions. While it’s income you don’t realize that you’re missing, it’s also an amount that can add up.

Long-Term Care is Expensive

If you develop a medical condition requiring long-term care, you will quickly discover additional pressure on your finances. This means both your current income and your long-term savings could be affected, depending on the severity of the illness or condition. Furthermore, you may find that you are no longer able to care for yourself the way you once could. Many people find themselves turning to a long-term care facility in order to help maintain their overall quality of life. While this is a great method for keeping your quality of life high, it’s not such a great choice for your wallet: an assisted living facility costs an average of $43,000 per year, while life in a nursing home will run an average of $92,000 for a private room. However, it is vital to receive the necessary care to keep yourself safe, no matter the cost.

Keeping Up with Physical Health For as Long as you Possibly Can

Keeping up with your physical health can go a long way toward helping to decrease your costs, especially as you move into your retirement years. Try to keep your physical health as strong as your financial efforts.

Maintaining your physical health doesn’t have to take all of your time and attention, but making an effort to improve your wellbeing now, can help keep yourself and your bank account healthy throughout your retirement years.

Your retirement belongs to you, make sure you get the most out of it. Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™ about setting yourself up for a healthy, fulfilling retirement.

A Primer on Government Debt and Deficits

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Debt vs Deficit

The federal debt is the total amount of money that the U.S. Government owes, and is a total of all of the deficits on a year-to-year basis. The deficit is simply the difference between what the government spends and receives on an annual basis. For example, if the U.S. Government spends $4 trillion in a fiscal year but only receives $3 trillion in revenue, the deficit for that year would be $1 trillion. Thus, the total government debt would be increased by $1 trillion.

Recent Context of Government Budgets and Debt

The debt balance for the U.S. Government currently stands around $21 trillion, while the 2018 fiscal year deficit is around $833 billion. From 2008 through 2016, government debt ballooned from about $10 trillion to almost $20 trillion and the 2008 Financial Crisis played a large role in this increase. With the U.S. economy in distress after 2008, the government spent the next several years stimulating the economy to get it back on track. This economic stimulus required much more spending and investment from the government than it was receiving in revenue.

According to the Peter G. Peterson Foundation, the U.S. Government has run a deficit in every year except for four (1998-2001). This is evidence that government spending is not as much of a Republican vs. Democrat issue as the media often makes it out to be.

Consumer Debt vs. Government Debt

Many people like to equate government deficit spending to using a credit card. While the government is using borrowed money similar to a credit card, this comparison does not hold up very well when you dive a little deeper. As mentioned earlier, government spending tends to spur economic growth during periods when the economy is not robust. In theory, a stronger economy means more people and businesses making more money, which in turn means more tax revenue for the government. Taking on personal credit card debt rarely produces more income for the individual spender.

Ultimately, both personal credit card debt and government debt must be re-paid to maintain healthy finances. To reduce debt, consumers and governments will generally employ some combination of increasing income/revenue and reducing expenses. When a consumer with outstanding debt passes away, their assets are liquidated to pay off their creditors. This results in fewer assets being passed down to heirs. Unlike humans, Governments exist into perpetuity. When the U.S. Government plans to spend more than what they receive in tax revenues, they issue new debt in the form of U.S. Treasury Securities. Governments, pension funds, mutual funds, and citizens rely on these securities as a substantial part of their investment portfolios. Yet, similar to credit cards, these Treasury Securities eventually need to be paid.

U.S. consumers should be conscious of their spending habits to make sure they are not over-leveraged. While the U.S. Government plays by different rules when it comes to deficit spending and debt, ultimately, the general goal remains reducing debt while stimulating the economy.

Inside the Economy: Trade Tariffs

By | Economic Discussion, Economy, Larry Howes, SH&J Blog | No Comments

On this week’s Inside the Economy, we review the number of new jobs that have been created in the U.S. economy this year. In addition, there continues to be a number of headlines related to the trade tariffs that the Trump administration wants to impose. Listen in as we look at each state’s biggest export/import partner and discuss what implications these tariffs may have on the U.S. economy.

Five Financial Tips for Today’s Grads

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Graduation can be an exciting time for young adults as they embark into a whole new world. Yet, it can also be overwhelming for many to face new financial responsibilities in adulthood. Many people envision adulthood as a state of maturity, but often overlook the idea of fiscal maturity: the act of taking ownership of your financial affairs and making the best decisions possible to balance todays’ expenses with saving for future goals.

The world of personal finances can be unforgiving, so we’re offering five tips to help you achieve financial success. By following these tips, you can avoid some common financial difficulties that many new graduates encounter.

1. Budget and Spend Wisely

Graduation is an excellent time to reevaluate, or begin creating, one’s budget. You can start by opening up an Excel spreadsheet and tabulating your anticipated expenses, making it as in-depth and detailed as you’d like. The chances are that your financial status has changed since being a full-time student, whether you experience a gap in employment or must adjust for an increased income. Additionally, it’s likely that you are now responsible for more bills, which is something that comes with financial independence.

By seeing these numbers on a spreadsheet, organizing them, and figuring out exactly where you stand, you can have a better understanding of what alterations you might need to make in your lifestyle to make sure your bills are paid on time and you still achieve your goals. This might entail spending wisely rather than fluidly. There are several apps available to help with budgeting, such as Mint, You Need A Budget (YNAB), or Wally.

2. Put Your Bills on Autopay

Some companies, including many student loan providers, offer incentives for consumers who put their bills on autopay. By setting up autopay on your main bills, such as rent, utilities, credit cards, student loans, and other recurring expenses, you can take advantage of these incentives while also making sure everything is paid on time and you don’t get any late payment penalties.

3. Use Credit Sparingly

While it is true that one has to build credit in order to have credit, there are risks associated with credit cards, especially those with high interest rates. While it’s easy to make the minimum payment, it’s important to remember that you should only use credit cards if you can afford to pay the complete bill each month. You could spare yourself hundreds of dollars, or more, per year by avoiding interest charges, and you build your credit score at the same time.

4. Save for Retirement and Take Advantage of 401(k) Plans

Although it might seem too early to contribute to a 401(k) plan when you are beginning your career and just finished tossing your graduation cap into the air, the earlier you begin saving, the better you are preparing for your future. Even starting with small amounts, by investing early you will amass more money to support yourself in retirement. Furthermore, many employers encourage their employees to invest in 401(k) plans by “matching” the employee’s contributions. To see if you qualify for this win-win situation, check with your company’s HR staff as soon as possible.

5. Don’t Ignore Your Student Loans

Because of the rising cost of education, the typical college student graduates with $37,000 in debt and the biggest financial concern of many recent grads is their student loans. When you graduate, take charge of the situation and review the terms of your loan. You need to determine how much you owe and how your payments fit into your new budget.

The very first step to creating a solid financial base is to establish a cash reserve of at least 3-6 months of expenses. After this is established, and if your lender allows it, you may consider making extra payments and asking the company to put the additional amount towards the principal balance of the loan, rather than the interest. Paying more than the minimum can shave years off the length of the loan, save you money over the years, and help you qualify for a better mortgage or auto loan.

No matter your situation, reviewing your finances does not have to be an intimidating ordeal. Taking control of your finances early actually empowers you to set yourself up for a more stable and lucrative future.

Inside the Economy: Tariffs, Rate Hikes and More

By | Economic Discussion, Economy, Larry Howes, SH&J Blog | No Comments

On this week’s Inside the Economy, we discuss the volatility that has crept back into the global equity markets. How does this stock market volatility compare to past market conditions? Last week the Federal Reserve raised rates by another .25%. How many more rate increases can we expect over the next 12 months? We also review the trade balances with the top four U.S. trade partners. What goods make up the largest portion of imports from China? Tune in to this week’s episode to find out!

Five Facts About Denver Real Estate

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It’s no secret that Denver real estate values have been on the rise, especially over the last five years. If structured correctly, your home could be sold in a matter of days. However, where are you going to move? Buying in Denver can be quite competitive as inventory stays historically low and median home prices continue to creep up.

In the last several years, many homeowners have seen their home values increase by $100,000+ within two years. Will this always be the case? We’ve compiled a few note-worthy facts about Denver real estate to lend perspective to Colorado’s real estate landscape.

  1. According to Colorado Home Realty, “The average single family resale home in metro Denver was $441,172 in 2016. Go back 40 years to 1976 and it was $39,740! A third of that increase has come in just the last five years.”
  2. Also according to Colorado Home Realty, “Homes are more affordable today than they’ve been for 34 out of the last 43 years”. This may seem counter-intuitive, but the calculation is based on mortgages as a percentage of average household income. The example used in the article explains that in 1979, the ratio of payment to income was 64%, versus in 2016, the ratio of payment to income was 38%. This is based on many averages, but creates an interesting point of view.
  1. A mid-2017 report from Your Castle Real Estate states “Our market inventory continues to be near record lows, with only 7,081 single family homes on the market as of June 30 2017 (16,000 – 18,000 is considered a balanced market).” When supply is low, prices increase. What would inspire an increase in supply to help create balance with demand? One option is building new homes. Colorado builders are expected to pull 23,700 single-family permits in 2017 and 26,000 in 2018, according to the University of Colorado’s Colorado Business Economic Outlook. While that looks robust compared with the sluggish pace of homebuilding seen after the recession, the CU forecast notes that builders pulled around 40,000 permits a year in 2004 and 2005, when there were 1 million fewer people living in the state.
  2. The Denver Post takes a more practical view of the difference in price point: “More than 60 percent of the homes on the market in Denver are in the top third of the price distribution, while just 15 percent are in the bottom third, according to Zillow.” This issue makes home buying under $500,000 especially difficult from a competition standpoint. 5280 magazine sums it up nicely with their Panic Meter:

Your budget: $1,000,000+
Your level of panic: Low. You could find your dream home—and actually buy it.

Your budget: $750,000 to $999,999
Your level of panic: Moderate. There are houses available, but you’ll still need to match list price.

Your budget: $500,000 to $749,999
Your level of panic: High. You’ll be competing against more buyers than usual due to people stretching their budgets to get into a less intense section of the market.

Your budget: $499,999 and below
Your level of panic: Very high. You might find the perfect house, but so will 20 other buyers.

  1. Contrary to popular media, millennials are “getting off the couch” and buying homes. A mortgage company reports “According to an industry-wide analysis, millennials accounted for 43% of all mortgage requests in Denver, between August 2016 and February 2017.” This statistic may help sellers understand the buying pool and how to structure a sale.

Buying a personal residence or an investment property is not a decision to take lightly and we suggest visiting with a CERTIFIED FINANCIAL PLANNER™ to see how the decision fits within your personal financial goals. Call Sharkey, Howes, & Javer at 303-639-5100 to schedule a complimentary consultation.

Inside the Economy: Tariffs, S&P 500, and the Housing Market

By | Economic Discussion, Economy, Larry Howes, SH&J Blog | No Comments

On this week’s Inside the Economy w/ SH&J, we discuss the impacts that the new tariffs may have on steel. Could there be a different event that has a more significant impact on steel prices other than the tariffs? The U.S. stock market has recovered from the February declines. Have S&P 500 companies’ earnings been increasing enough since the Great Recession to justify the market being at all-time highs again? Tune in to find out the answers to these questions and more!

Making Goals the Center of Your Investment Strategy

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For some investors, targeting the highest rate of return possible or beating a particular index is the only investment strategy, but what is driving that strategy at the core? In building efficient portfolios, investors often answer a series of questions to determine tolerance for risk, short-term market swings, and downside volatility. These factors are important to consider, but beyond that, what is the purpose of the money? What is the goal the investor is trying to achieve and what is the time horizon? The shift in focus to achieving a successful outcome or reaching a goal rather than a particular rate of return is what drives goal based investing.

What Is the Goal?

Establishing a goal or a purpose for the money being saved (instead of spent) allows investors to visualize a more tangible outcome, rather than focusing on outperforming a certain index. Goals range from building an emergency reserve, saving for a house downpayment, saving for children’s college education, saving to start a business, saving for retirement and much more. Assigning a purpose to the money psychologically creates more of an incentive to save. This helps investors track their progress toward achieving their goals.

What Is the Time Horizon?

While downside volatility and short-term market swings are not to be ignored, assigning a time horizon to each goal is a critical step for determining appropriate portfolio construction. If a particular goal has a long time horizon, short-term market swings should be less of a driver in the asset allocation decision-making process. On the flip side, if the desire is to fund a goal within the next couple of years, market swings and volatility become more impactful. In some cases, it may be prudent to not invest the funds at all. Investing spans across an entire lifetime and it is important to pair each goal with its life stage.

Contact Sharkey, Howes & Javer to speak with a CERTIFIED FINANCIAL PLANNER™ professional about establishing a portfolio allocation that aligns with your goals and life journey.