Surefooted Approach to Owning Your First Home

Buying a home for the first time in the early stages of a legal career while paying student loans may appear daunting. If your starting salary is less than your outstanding student debt amount, homeownership might seem like a distant dream.

Studies within the legal profession have repeatedly shown these anxieties. In July 2020, the ABA YLD Law School Student Loan Debt Survey Report of more than 1,000 young lawyers found 56 percent had postponed buying a home or decided not to buy one because of worries about their existing student loan debt.

However, with careful planning, research, and the right mortgage provider to help you navigate the process, you can reap the benefits of homeownership. The most obvious of which is building equity—the difference between the current market value of the property and the mortgage amount you owe. 

First Things to Consider

Before you can begin building equity, two things are essential:

1. your credit score
2. a pragmatic assessment of your lifestyle expenses atop the student loan repayments relative to your monthly income

For many lenders, a good credit score (at least in the low 700s) is vital in the current economic climate when getting on the property ladder. The timeliness of outgoing payments in the credit report is also important.

Next, appraise your current household and lifestyle expenses, the likelihood of them increasing or decreasing, and your maintainable near-term savings. For your savings, a cushion of at least three to six months of liquid reserves is favorable when eventually applying for a mortgage.

If possible, consider whether you can refinance your student loan(s) at a lower rate. Be aware that refinancing may cost you access to federal programs. For example, federal student loan repayments were placed on hold for some time due to COVID-19 relief.

Finally, determine the cash you will have for a down payment, including gifts and unsecured loans.

Getting Approved

After all of this, you should approach a mortgage provider to review your options. A mortgage provider can pre-approve a specific loan amount, which is ideal before house hunting.

Ratios

Having a pre-approved amount will give you more negotiating power with home sellers as well as a finite assessment of what sort of property is within your grasp. The ratios lenders typically look for include:

• Housing or front-end ratio: monthly housing costs, including mortgage payments, property taxes, insurance, and monthly maintenance fees, if applicable, as a percentage of monthly gross income
  
• Total or back-end ratio: monthly housing costs, plus payments on consumer credit and other long-term debt as a percentage of monthly gross income
  

As a rule of thumb, Citi Private Bank believes that ratios should not exceed 43 percent of your monthly gross income. After you are pre-approved, you can make an offer on a property that’s ideal, and if accepted, you are on the path to homeownership.

Mortgage Options

A buyer should then carefully examine the available mortgage options. These include:

• Fixed-rate mortgages: capital repayment level and interest rate stay the same for the duration of the loan
• Adjustable-rate mortgages: the rate may increase or decrease after an initial period
• Interest-only mortgages: typically, initial interest-only payments are lower, which subsequently increase to include both principal and interest

Choosing the right option is crucial, as is understanding the applicable interest rate and its lock-in or float (the number of days that the lender guarantees you a specific rate and mortgage terms. This may fluctuate until the loan is ready to close.

Final Steps

Once the mortgage is approved, you can turn your attention to the final closing stage and make room for costs such as appraisal, title search, insurance, survey, home inspection and legal fees, escrow requirements, and mortgage application charges.

In our experience, closings typically occur within 30 to 90 days of approval, subject to contingencies on the contract.

Finally, always seek professional advice, assess the affordability of the mortgage, and never lose sight of the fact that your home serves as collateral for the loan until the mortgage is paid off.