My daughter just graduated from Medical School and starts her Residency in Chicago. She is considering renting a place there. She will be paid $45,000 in her first year and the pay incresses thereafter. She has a student loan of about $160K. Is buying a house/Condo an option for her instead of renting. Will she qualify? We (parents) could help her out with down payments and even possibly co-signing her mortgage. Is this possible? Is this a good idea? What are the tax implications to her and the parents?
Purchasing a home is a major step, and many factors need to be taken into consideration prior to making a decision to move forward. I cannot say whether she will be able to qualify. You have not provided me with enough information to answer with a yes or a no. It is possible that as parents you can provide the down payment for your daughter and co-sign for the mortgage. With respect to the tax implications I encourage you to speak with a certified tax professional to discuss what implications may occur. Below, I can provide you with an overview of the factors you and your daughter should consider when thinking of purchasing a home.
Before you buy a home, it is crucial that you weigh how you can afford to pay for it. You don’t want to waste time or money by bidding on a house that you cannot afford or by applying for a loan that is beyond your means to pay month after month and year after year. Figuring out your budget for your home will make it easier to get the right loan and also to know what changes you may need to make to your finances and to you credit profile. (Credit Profile vs. Credit Score)
As a standard rule you are advised to buy a house worth no more than 3 times your gross household income. Use this figure if you have some other debts, such as student loans, car payments, or sizable credit card balances. If you have no other debts, you likely can afford a house that costs as much as five times your annual household income.
When potential lenders review your ability to qualify you for a home loan, they are going to pay close attention to your debt-to-income ratio (DTI). To determine your DTI, start by computing your total net monthly income. This includes your monthly wages and any overtime, commissions or bonuses that are guaranteed; plus any pension monies or monies that come from alimony or child support, if applicable. If your income varies month-to-month, calculate your monthly average over the past two years. Don’t forget to include any other monies earned, whether from rentals or any other additional income.
To determine your monthly debt obligations, make sure to include all of your credit card bills, any loans, such as automobile, student, or personal and the amount of the new mortgage payment in the loan that you will apply for. Make sure to include your monthly rent payments if you rent. When you are adding up your credit card obligations, use the minimum required monthly payment. Divide your total monthly debt obligations by your total monthly income. This is your total debt-to-income ratio. The lower your DTI, the better. A high DTI can prevent you from getting the loan. It also can be a warning sign that even a loan that you qualify for could be a serious burden to make each month.
Most lenders traditionally will qualify your for the loan with a DTI of 28% to 44% of your monthly income. In other words, if your monthly income is $4,000, the lender would ordinarily want you to pay no more than $1,760 (.44 x $4,000) toward all your debts. Some sub-prime lenders will allow borrowers to have DTI ratios as high as 55%.
You may have compensating factors that will allow you to qualify for the loan, even with a less than desirable DTI. For instance, if you have an excellent credit record, a lender might allow you to go more deeply into debt. Just how high a DTI you can have and still qualify for the loan will depend on such factors as the amount of your down payment, the interest rate on your new mortgage, your credit history and score, and how much other debt you are carrying.
Continue on the Part 2 of Qualifying for a Mortgage and discover mortgage qualification terminology, paperwork, and more.
I hope this information helps you Find. Learn & Save.