Financial Aid 102 – How going to the wrong college can affect your ability to ever own a home

What!  You mean if I go to college I may never be able to buy a house!!!!

Scary huh?  But yes, that is what I mean.

Here’s something you will almost never learn about until its too late.  When it is time to get a mortgage (for a house or fancy NYC/LA apartment), the bank will go by the 30% rule.  What that means is they will calculate how much they are willing to loan you based on a percentage of your gross income, usually around 30%.  It works like this:

Let’s say you earn $30,000 a year.  The bank assumes that out of that $30,000 a year, you can afford a grand total of debt (credit cards, student loans, car payments, student loan payments) equal to 30% of your income.

In this case, that equals out to $10,000 a year or $833 a month.

They then take $833 and subtract any outstanding loan payments you have, sort of like this:

$833 total availalbe

-$100 Car payment

-$150 Credit Card payment

-$400 Student Loan payment

Total left over:  $183

That means that by their calculation you can afford a monthly house payment (which includes mortgage, taxes, and insurance) of $183 a month.

Using CNN Money’s Mortgage Calculator that means you can buy approximately a $34,000 house at 4.75% interest with $10,000 down.  In most parts of the country, that means you can’t afford a home.  And since student loans are often given a 30 year repayment period, you’re home buying ability may be diminished for a long time.

Scary huh?

It is, but its better to learn these things now than 5 years down the road when you’re already in trouble.  Again, if you fall into the category of having to pay for everything yourself, it does not mean you can’t pursue your dreams, it just means you have to be creative in doing so.  And believe me, there are plenty of people who fall into that category.


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