New FHA Mortgage Guidance Will Impact Borrowers With High Student Loan Debt

Gentle Readers,

I was having dinner with Mabel recently and she had some bad news for me. The federal government has issued new guidance for FHA loans. This guidance will make it far more difficult for people with high student loan debt to qualify for a mortgage. Me. It will make it far more difficult for me to qualify for a mortgage.

The Federal Housing Administration insures mortgage lenders as a way to encourage home ownership in the US. The FHA does not issue mortgages, but mortgage lenders use the insurance to stay in business in case too many people enter foreclosure. The FHA has guidance for the type of qualifications a person must meet when applying for a loan. If you are eligible for an FHA approved loan, your down payment can be as low as 3.5% which is far more attainable than the standard 20% necessary to avoid PMI. Not all mortgages meet the qualifications for an FHA loan.

Part of what the FHA measures when determining your loan eligibility is your debt-to-income (DTI) ratio.  Naturally, student debt counts as debt. However, it can be difficult to know exactly how to count this debt. Borrowers are allowed to pay back under a number of different terms and conditions. You may have a 10, 20, or 30 year schedule with or without some forgiveness of the debt itself. It’s complicated.

What concerns me today is the new rules for those of us who are paying back our student loans on an Income Based Repayment (IBR) Schedule. In IBR, you pay a percentage of your income towards your debt each month. This is not an amortizing payment. It is not intended to efficiently wipe out your debt. It is intended to give financial breathing room to people with student loan debt that is high in proportion to their income. I pay roughly $500 a month toward my student loan debt because of IBR. If I was paying an amortizing payment, I would pay closer to $1500 a month.

The FHA has new guidance for mortgages for people under IBR. If I want to use an FHA Loan, they will calculate my monthly debt obligation in a new way now. They no longer consider what my IBR obligation will be each month, which makes sense as the IBR changes yearly based on last year’s income.

The pertinent changes:

FHA 4000.1 Section II. A. 4. B. (H)

(4)  Calculation of Monthly Obligation
Regardless of the payment status, the Mortgagee must use either:

  • the greater of:
    • 1 percent of the outstanding balance on the loan; or
    • the monthly payment reported on the Borrower’s credit report; or
    • the actual documented payment, provided the payment will fully amortize the loan over its term.

What this means for me personally at my current student loan debt levels is that I will likely be ineligible for an FHA loan.

  • If my student debt obligation was calculated as it is now incurred, it would be $500/ month.
  • If my student debt obligation was calculated at 1% of the loan balance it would be $1450/month.
  • If my student debt obligation was calculated as if I were in the process of fully amortizing my loan over a 30 year term, it would be $936/month.

These are very different debt calculations and will absolutely impact my ability to get a loan. The difference between $500 and nearly $1500 will be a killer on my DTI ratio, which must be under 43% in order to qualify for any loan.

If I make $4000 a month, and have a $1500 a month student debt payment and $650 in other obligations, I would have a DTI of 2150:4000. Over 43%.

If I make $4000 a month, and have $500/m student debt payment and $650 in other obligations, my DTI would be 1150:4000. Under 43%

This change is literally the difference between getting a home and not.

With an income of $4000 per month, the highest my debt obligation could be and still leave me eligible for a mortgage is $1720.  After subtracting my other obligations, I would need my other student loan obligation to be less than $1070/m.

To get to $1000 a month in student loan debt obligation, I would need to reduce my student loans to $100,000 from their current high of roughly $145,000.  Alternatively, I could attempt to  increase my earnings to $5000/m and then my 2150:5000 DTI would be 43%.

So, plans must change. I have to kill my student debt.

Previously, my plan of action for when my income doubles was to increase my investment payments at a far greater rate than paying down my student loan debt since I wanted to get the magic of compounding going. My new plan must be to reduce my debt obligation significantly.

When the income doubles, if I make $8000/m, at least $5000 needs to go towards student debt. I have two student loans. One of them is roughly $45000 currently. I will focus all extra payments on that one. In nine months of focused payments, that debt will be almost wiped out.

I would still be left with a student loan obligation that is roughly $100K. 1% of 100,000 is $1000. If I had that $1000 plus $650 in other obligations against an income of $8000/m, my DTI would be 1650:8000. I would be eligible for a loan. With a doubled income, the highest DTI I could have and still be eligible for a loan would be 3440:8000.

Has governmental guidance ever changed your plans in a major way?

 

 

Net Worth Week 15 – Dental Pain Edition

Gentle Readers,

There’s been a slight setback in my finances due to some pain issues I’m trying to take care of.  It’s been a physically painful week in my house. I had my semi-annual dental cleaning and learned the reason for some of my jaw pain – I have a new wisdom tooth that is stuck inside for the next six months at least. My chronic, undiagosed back pain also grew much worse. My physician won’t even look at the body parts I complain about so I’ve been pursuing some alternative healing methods. I have an acupuncture and massage appointment this weekend to try to help with this pain until I can find a new doctor. This will cost me roughly $100 because I’ve found places I trust that give really good deals. Hopefully my back approves. I miss being able to run. My girlfriend misses me not being in constant pain.

I initiated a balance transfer on the 15th and it went through today. My old Barclay Card missed me and offered me zero percent financing until next July. I intend to pay it off before then, and it will be a lot easier when it is not earning interest. Thank you, to YETInvesting for talking me through the process and encouraging me. Hopefully this will help my debt reduction process.

I would be delighted if you read my entry to win a trip to FinCon. I’d love to meet y’all.

I still love Earnest and credit them with my ability to conquer some of this debt.

Date 7/1/16 7/8/2016 7/15/2016 7/22/2016
Joy 1099 1099 1099  1099
Travel 323 323 323 323
Down Payment  19 19 19 19
retirement  21 21 21 21
health  45 45 45 45
Moving  31 31 31 31
EF  2002 2002 2002 2002
Business  1 1 1 1
Bed  .29 0.29 0.29 0.29
Life  1929 863 746  897
IRA  9580 9653 9894  9908
Brokerage  324 329 335  337
CC (largest)  0 0 0  -4791
CC (longest)  0 0 0  -529
Rewards Card  -5675 -5247 -4862  0
SL 1  -102482  -102258 -102374 -102489
SL 2  -45112  -45010 -45062 -45115
Earnest  -9328 -8878 -8897 -8915
-$147222 -$147006 -$146678 -$147156
  .35% change .14% change .22% change  -.32% change

Have medical issues ever set you back financially?

Preparing to Buy a Place – 1 Year Out

Gentle Readers,

In April 2016  – I made the decision to get my financial house in order, because it is time for them to become my erstwhile roommates. This is the true reason I started this blog. I know that I work best under “pressure,” which is where putting my financial mess out in public comes in. This is a space for me to learn and grow.

I know a few things. I need great credit so that I can get a favorable rate on my mortgage and I need a down payment.

My Fico Score was 732 when I made this decision. This is essentially what it was before I opened my business two years ago.  It was great, but not excellent. By most reckonings, the bottom end of excellent is 750. I was close. That 18 point difference will make a difference on the APR I’m offered on my mortgage, and thus on the amount of interest I will pay over the life of my loan.

Once I made this decision I began making calculations.  How long to pay off my CC debt.  How long to save up a deposit. How to get my credit score up.

I’m on track to pay off my credit card debt by October or November, barring new expenses. I have an upcoming dentist visit and I think it will be time for adult braces due to some bad changes in my mouth. Expensive. I’ll see if they have a payment plan.

I’m glad to report that my credit score is now 787 as of May. HAPPY DANCE!

I did this by paying off two of my three credit cards. I took out a loan through earnest to do this.  I learned that the right type of credit (the earnest loan) looks more like a mini-mortgage and makes me look more responsible. I also kept the amount of credit utilized on the other card low because I learned that having less than 30% of your available credit utilized makes a difference in your credit score. This is why I did not close those cards, but continue to use them for tiny purchases each month. 

I did all this in April. More than 6 months before I would approach a lender to see what I could get pre-approved for.  It worked. All of this concentrated effort paid off. I’m firmly in the excellent credit category and can keep improving.

I also put more of my expenses on auto-debit so that I won’t accidentally miss them.

I learned that a mortgage should not be more than 2.5 times your annual salary. I had never heard this rule, but it makes sense to me. Helps me to plan. Thanks to Freedom is Groovy for linking here to Fritz Gilbert’s Retirement Manifesto, which is available here.

I do not consider the place I live to be an investment since I need to live somewhere. I do not want to tie up too much of my capital in my mortgage and other housing costs. That means I’m looking to pay little. I don’t want to live in a dump, but I don’t want something incredibly nice.

Things I need to learn:

  • What the heck is a basis point?
  • Will I even be able to get a mortgage without a cosigner since I have years of contingency work?
  • FHA loan rules.
  • HOA rules.
  • The differences between condos and coops.
  • If I want a coop, learn about the coop mortgage rules.
  • How much of an emergency fund will make me feel secure?

Things I need to do:

  • Pay off the rest of my credit card debt.
  • Get into no more credit card debt
  • Save a down payment.
  • Save enough money to actually move.
  • Prepare my financial documents so I’m ready to talk to a lender.
  • Find a realtor I respect
  • Decide what I want versus what I need in a home.
  • Monitor the local market.
  • Buy a home.
  • Take advantage of my access to a garage to paint and/or build the furniture I want for the new space.
  • Move.
  • Unpack.
  • Not share my shower with people I’m not in love with.

How did you prepare when you wanted to buy a home? Am I missing anything?

 

 

 

Net Worth Week 14

Gentle Readers,

There is still steady progress in my net worth. It’s a turtle’s pace, but the turtle will get there.

If you want to know more about my life philosophy, read this piece on empathy and curiosity that I wrote as an entry for a contest to win a trip to FinCon.

Hearing about the attack in Nice and feeling like this violence won’t end. Be good to yourself, friends. Hug your people.

I still love Earnest and credit them with my ability to conquer some of this debt.

Date 6/25/16 7/1/2016 7/8/2016 7/15/2016
Joy 1098 1099 1099  1099
Travel 323 323 323 323
Down Payment  19 19 19 19
retirement  21 21 21 21
health  45 45 45 45
Moving  31 31 31 31
EF  2597 2002 2002 2002
Business  1 1 1 1
Bed  .29 0.29 0.29 0.29
Life  1140 1929 863  746
IRA  8765 9580 9653  9894
Brokerage  315 324 329  335
CC (largest)  0 0 0 0
CC (longest)  0 0 0 0
Rewards Card  -5347 -5675 -5247  -4862
SL 1  -102284  -102482 -102258 -102374
SL 2  -45067  -45112 -45010 -45062
Earnest  -9306 -9328 -8878 -8897
-$147748 -$147222 -$147006 -$146678
  -.24% change .35% change .14% change  .22% change

How did you acclimate to slow and steady progress when you have a hare’s heart?

Road Less Traveled Challenge

Gentle Readers,

If you are not reading Our Next Life, you are missing out on some delightful people. They have issued a challenge whose mantle is well-worth taking up.

The challenge: Instead of talking about what we’re all doing that’s the same (saving at a high rate, optimizing our budgets, etc.), let’s celebrate what we’re each doing that’s unique.

My unique path is relatively simple. I’m a dyke and have been setting my own course from a very early age. If you do not conform to heterosexuality and the assumptions that many people attach to it, you must necessarily decide what life should be for you because there are fewer examples. This is a blessing. You have to figure out what is important to you. You have to create your joy. The day I graduated from high school, I moved out of my “family” home. I’ve been forging an expanded version of family and what life means for me ever since.  It changes with new information and new versions of myself. Self-improvement means that you have to accept new ways of being.

I was fortunate to find other families to take me in at all times. I was never on the street. In other people’s homes, I found a way to contribute, but mainly I learned from them and appreciated the safety and food they provided. The conclusion I reached from living with so many diverse people was that every person believes they are normal. Every person thinks that the way their family has always done something is the way to do something. Everyone’s assumptions are hidden from themselves because they’ve lived in them for so long. The greatest thing about my early nomadic lifestyle was to see through the veil of normal. There are a million ways to “properly” prepare dinner, and all of them are right for someone.

The way you’ve always done something does not have to be the way you continue doing something. 

Until very recently, I never imagined that I would be able to retire at all. I have significant student loan debt and some personal debt. My net worth is hovering around -$150,000.  However, there has been a change brewing in me. I see hope to drastically alter my situation through two different mechanisms.

The first mechanism involves learning a skill that will double my earnings. I’m really enjoying the learning process and plan to continue learning it even after it becomes profitable for me. Once I’m able to do temp work based on that skill-set, my take home pay will skyrocket. It will be enough money that I could realistically pay off all of my debt and save for a down payment in a high COL area in three years or less. With a much higher income, I intend to take a “balanced” approach. Credit card debt will be knocked out entirely in a month. Then I will save a down payment while increasing my emergency fund. If all goes well, I’ll find a small place that is affordable. Once I get an understanding of what my mortgage feels like on my bank account, I will shift focus to buying index funds and paying down my student loans. After the educational debt is gone, I will probably work one more year doing the highly lucrative temp work and plow most of my earnings into index funds.

Then, I will stop.

I will shift to my second mechanism. With the encouragement of my best friends and girlfriend, I started an LLC two years ago that will eventually allow me to live the lifestyle I desire. The work is a passion of mine and contributes to making the world better. With an appropriate nest egg and low expenses, I could work 20 hours a week doing something of value for the world without wearing myself out. My free time will be mine. I will have slow mornings with strong coffee.

I will use the freedom to travel to practice languages I’ve learned. To go on miniature adventures and learn even more ways people view their choices as normal.

I will use the freedom to create things. I like to write stories and paint furniture. I think I will continue to like that in the future.

I will use the freedom to properly learn how to cook. I’m an excellent baker, but my cooking skills are mediocre. Classes would be wonderful. I love food. I’m sure I can learn.

I will use my freedom to continue volunteering for organizations in my city. I will use my freedom to be a more involved citizen.

I will use my freedom to get a puppy. A big one.

What is your unique approach to life and FIRE?

Net Worth Week 13

Gentle Reader,

Man, the violence in our world is a lot sometimes. It is hard to be hopeful, but then I see the image of the strangers in Dallas who immediately surrounded a baby in a stroller when the shots rang out.  They were willing to put their body in harm’s way to protect a small life. That crowd was diverse and, I assume, did not all personally know that baby. They did not know why the shots were happening or who was being targeted, but they decided to protect a defenseless child. That is my hope for the world. That crowd of strangers who chose danger for another.

I know that y’all noticed I was quiet on twitter this week, and thanks for checking on me. PF bloggers are a great community. I had family in town and they had shenanigans to put me through.  I’m still trying to win my way to FinCon – in large part to meet y’all. It is already an honor to know you and I can only suspect that honor will grow when I can shake your hand.

My net worth plucked along in the positive direction and that small victory is helping me remember the destination this journey is leading me to.

I still love Earnest and credit them with my ability to conquer some of this debt.

Date 6/17/16 6/25/2016 7/1/2016 7/8/2016
Joy 1098 1098 1099  1099
Travel 323 323 323 323
Down Payment  19 19 19 19
retirement  21 21 21 21
health  45 45 45 45
Moving  31 31 31 31
EF  2597 2597 2002 2002
Business  1 1 1 1
Bed  .29 0.29 0.29 0.29
Life  1839 1140 1929  863
IRA  8285 8765 9580  9653
Brokerage  221 315 324 329
CC (largest)  0 0 0 0
CC (longest)  0 0 0 0
Rewards Card  -5300 -5347 -5675  -5247
SL 1  -102268  -102284 -102482 -102258
SL 2  -45017  -45067 -45112 -45010
Earnest  -9286 -9306 -9328 -8878
-$147390 -$147748 -$147222 -$147006
  -1.0% change -.24% change .35% change  .14% change

Have you been encouraged by small progress?

My Frugal DIY Hair Routine

Gentle Readers,

You know that I have a frugal face-routine, and you will not be surprised to learn that my hair routine is similarly personally tailored and low-cost. I spend less than $2 a year on the products I need to look fantastic.

I have a very short hair-cut and was frustrated at the amount of money I was spending on shampoo and conditioner and products. It felt wasteful. It was also just silly since none of the products did precisely what I wanted.

I have very clear vanity needs. I want to look a very particular way. I like that women stop me on the street to tell me how much they love my hairstyle. I even had a woman at my podiatrist’s office ask to take photos of my hair, because she is a stylist and wanted to try and replicate it.

Everything that touches my head is created by me.

I ditched traditional shampoo and conditioner nearly two years ago. I read around and asked my friends, and learned about the No Poo movement (a horrible name).  I thought it was worth a shot since the ingredients were simple and were things I had around my house. I was also intrigued at the idea of washing my hair once a week. Shorter showers means less water waste and more time sleeping in.

On Sundays, I wash my hair.

I have a little container I bought at CVS that holds some baking soda and water. I use a squeeze bottle with a lid that closes so it does not dry out. That’s all you need. I personally add tea tree oil,  which is good for my scalp since my hair is so thick. I don’t like the smell of tea tree, so I add in some mint oil  to have a smell I like that adds a little scalp tingle.  I pour some into my hand and scrub it into my scalp. I leave it in until I feel the tingle and then rinse it out. After that, I use a bottle that is 1/4 apple cider vinegar and 3/4 water as conditioner.  I make sure to rinse thoroughly because I don’t want to smell like a salad. Once I’m out of the shower, I warm a tiny bit of coconut oil in my hands and put it through my hair as a deeper conditioner. That’s it. My hair is clean for a week!

I like my pomade to have a little bit of shine, but mainly I want it to just let my hair’s glory come through.  My current favorite version is easy to make and much cheaper than buying a product that someone else made for me.

I use a glass bowl and a pot as a make-do double-boiler. In the glass bowl I put some Shea butter or coconut oil and then half as much Beeswax.  It melts quickly on a low heat. I stir it and watch carefully to prevent burning. Once it is all melted down, I put on my potholders and carefully transfer into a little metal one ounce container. I let it sit with the lid off until it solidifies. That’s it. My pomade is ready for 8-12 months. You only need a little when your hair is short.

The shea butter version feels a little greasier, but is nice in the winter when my hair just wants a little more love. The coconut version is my go to in the summer when looking crisp is my greater goal.

Sometimes I add an essential oil for a little scent, but not much, because I don’t want to cause anyone to have an allergic reaction around me. I try to have so little in that only someone who actively tried to smell my hair would know.

Do you make any of your own hair products? Share your recipes below.

 

Happy Independence Day, USA!

Gentle Readers,

Our founding documents are beautiful, but they did not apply to every human on our soil when they were created in defiance of the British. It has taken time and incredible strife to expand the definition of who receives the benefits of liberty and the freedom from tyranny.

Many thoughtful, intelligent men came together to write and agree upon the terms, and, still, we’ve been fighting at the Supreme Court and through the legislature about what we really meant by these terms since we created them.

Have heart. Your plans may change with new information. Your plans may change as your personality changes with the new information. You are one person attempting to plan for a purposeful life in a vast world with conflicting information and ideologies. The future is unknown. The men who wrote and signed our documents could not imagine our world, but they did their best to plan for it. You’ll get more free, too.

Happy Fourth of July!

Net Worth Week 12 – A Glimmer of Progress

Gentle Reader,

This summer and year have been about volatility in unexpected places. We all watched the markets dip and rebound after the initial Brexit vote. I personally had some shenanigans at my gig, but was really encouraged by the community’s response to my attempt to get to FinCon. Y’all are wonderful and supportive. Thank you.

I am an hourly employee at my temp gig, and I had the misfortune of being sent home after a half day unexpectedly. I did nothing wrong, but they could not get their systems to work, which meant that I couldn’t work either. This will definitely impact next week’s paycheck and comes at an unfortunate time since I had worked a half-day on Monday as well. You are guaranteed nothing as a contingent employee. This week reminds me that I need to pursue FIRE to rid myself of the vicissitudes of laboring for others.

Brexit definitely impacted my retirement accounts. I’m personally on the right track, but am worried for the world in the next few years. Increased volatility hits financial markets definitely, but it absolutely increases violence in the world. I’m watching Venezuela and worrying what other countries will respond to market conditions in a similar vein.

I still love Earnest and credit them with my ability to conquer some of this debt.

Date 6/10/16 6/17/2016 6/25/2016 7/1/2016
Joy 1098 1098 1098  1099
Travel 322 323 323 323
Down Payment  19 19 19 19
retirement  21 21 21 21
health  45 45 45 45
Moving  31 31 31 31
EF  2597 2597 2597 2002
Business  1 1 1 1
Bed  .29 0.29 0.29 0.29
Life  1729 1839 1140  1929
IRA  8516 8285 8765  9580
Brokerage  226 221 315 324
CC (largest)  0 0 0 0
CC (longest)  0 0 0 0
Rewards Card  -5434 -5300 -5347  -5675
SL 1  -102120  -102268 -102284 -102482
SL 2  -44971  -45017 -45067 -45112
Earnest  -9258 -9286 -9306 -9328
-$147176 -$147390 -$147748 -$147222
  -1.0% change -1.0% change -.24% change  .35% change

How did your week go? Have your accounts already recovered from Brexit?

What Financial Health Means to Me – Fincon 2016

Gentle Readers,
I want to travel to FinCon this year, but it will be hard on my budget. I live on the East Coast. I’ve never even been to California at all. You know that I am working my behind off to get out of debt. My goal is to end my credit card debt by November. A cross-country flight and a few days in a hotel would definitely impact that goal negatively.  I’m trying to win my way to FinCon instead.
The brilliant planners at FinCon partnered with The Center for Financial Services Innovation for an essay contest and some lucky bloggers will receive support for traveling to San Diego if their piece on Financial Health is excellent. #FinHealthMatters!

For me, financial health is the freedom to pursue empathy and curiosity in equal measures.

I believe that radical empathy is one of the greatest traits available to humans. It increases resilience and takes you down unplanned paths. It is incredible. Even if you only ever get to the point where you can practice radical empathy on yourself, you will have gained the world.

Empathy teaches you. It grows you. It allows you to make peace and joy with the previous versions of yourself. It allows you room to grow into many new selves as you change in time with new data and situations.

Having empathy for others means that you can learn from them, too. You do not have to contain all knowledge, nor do you have to make all mistakes in order to learn and grow. Empathy for others will reveal what choices, financial and otherwise, are better for the world. Empathy will have you shoveling your elderly neighbor’s sidewalk and sit down for tea and conversation as payment. Empathy will give you a glimpse into other sides of your community. Empathy will reveal whole new worlds to you.

My other favorite character trait is curiosity. Curiosity will give you so many opportunities. You will open and walk through so many doors that you cannot imagine right now. Curiosity unbounded taught Galileo realms of science that had not yet been discovered. Curiosity led Elon Musk to create the Tesla because he wanted an option that did not require fossil fuels. Curiosity led Picasso to deconstruct the lines of the body to see deeper into color and meaning than most artists before him. Curiosity told e.e. cummings to destroy syntax to create some of the most moving poetry in the English language.

When I’m truly financially healthy, I have the time and energy to grow both of these traits. I am able to understand other perspectives and add to my knowledge and wholeness. I am able to create things that the world has never seen before. Financial health allows my mind to play and frees me to create new solutions to old problems. When I’m financially healthy, I can afford the time and money to support other people with my time and money. We all grow more whole as a result.

What does financial health mean to you?