Make a large payment toward student loans before getting pre-approved?

Question

Hi,

My husband and I are looking to get pre-approved for our first home very soon (this weekend).  Our only debts are his student loans.  Our combined assets outweigh his total debt (not sure if this matters).

My husband has been making his minimum monthly payments but also likes to put larger payments toward the loans to help pay them down sooner.  He has saved to put about 7k down for the next large installment.  My question is:  should he make the extra payment or should we wait until after we've received our pre-approval. If so, should we also wait until we actually find a home and secure a real loan?

By making a larger payment we'll have less debt but I've heard that you shouldn't make large payments right before getting approved.

Any advice is appreciated! Thank you.

Mark Ferguson · Answer

Oscar Perez, I completey agree!  My returns on my rentals are so much higher than any of the interest rates on my cars or principle house.  I don't pay anything extra on my low interest loans.

Oscar Perez · Answer

Ashley Sommer In my experience, the lender places more weight on your total household income as well as your longevity with your employer. The debt to income ratio is key. I know I'm going to get a lot of hate mail from Dave Ramsey disciples, but as long as the interest rate is low on your student loans, don’t rush to pay them off. Your cash is better spent picking up investment properties to build up your real estate portfolio. I truly believe there is a small window of opportunity here to buy properties while the housing prices and interest rates are still low.

Just my 2 cents…

Ashley Sommer · Answer

Oscar Perez  Thanks for your reply.  Based on the guidance we are receiving we are going to just make the monthly minimums at least until we secure a loan and purchase a property.

Mark  Ferguson Thank you for replying. Right now we don't have any properties and the ones we're looking at don't look like they are going to perform better than our loans. These aren't necessarily deals we're going to peruse just the options that seems to be in our area.  It still sounds like cash is good to have on hand so we'll be cautious with pre-paying loans.

Jeff Arndt Thank you for the tip! We both miss that cutoff but a little bit which I guess isn't the worst problem.

Aaron Junck Thank you for posting - I am seeing everywhere on BP that cash is an REI's best friend so we are going to try to hang on to ours!

Aaron Junck · Answer

IMO I say no cash is king . And if you have no cash that limits your options.

Jeff Arndt · Answer

If you make less than 70k a year you can deduct up to $2500 of student loan interest each year.  This in turn lowers your effective interest rate on your student loans even further.

Oscar Perez · Answer

Also remember that you are paying off those low interest rate loans with inflated dollars.  Inflation reduces your debt.

Ashley Sommer · Answer

Paul Cordero  & Jeff Arndt  Thank you both for your response.  This is very helpful!  We will continue to make the minimum monthly payments and hold off on the large payment until we close.

I do wish a 7k payment would eradicate our loans! Unfortunately, we're pretty far from that.

I move most of my paycheck to a Capital One savings account each pay period so my checking account is rather sparse between pay checks.  Is there a big advantage in waiting to get pre-approved the day after I get paid so there is as much as possible in my account? Or will they see my salary and be able to conclude on their own that the account gets replenished every two weeks?

Thank you again

Jeff Arndt · Answer

I agree with Paul.  Wait until after you secure the final loan before you pay off the debt.  Lenders will look at your debt to income ratio (DTI).  Not always your total debt.  They want to know your ability to pay each month.  Even though you payed off 7k off the loan, you are still required to make the same minimum payment each month even though the principal is 7k less.  Whether it is payment 1 or payment 101, the lender will view the debt the same on a DTI basis.

Unless the 7k will eliminate the loan completely.  Then this may help you completely remove the monthly debt service and decrease your DTI.

ex.  Income = 3000/mo.
student loans = 200/mo.
PITI = 1000/mo.

With loans: DTI=1200/3000= 40%

Without loans: DTI=1000/3000= 33%

Paul Cordero · Answer

Wait until you have closed the loan for your new home.  Having reserves will make you a stronger candidate for loan qualification.  Pay the student loans down after you close.

Make a large payment toward student loans before getting pre-approved?

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