How to Save For a Down Payment (When You’ve Got Student Loans)

My husband and I have been married for two years. We have two dogs and run a business together. But this year, we plan to make the ultimate commitment: We’re going to buy a house together.

We’re looking for a starter home in Indianapolis. We’re not looking for anything too fancy–two bedrooms, a decent backyard and a finished basement. We’re hoping to spend between $115,000 and $160,000, but we’re prepared to plunk down more if we find our dream home.

Like many millennials, student loans and lower paying jobs mean we’re buying our first home a lot later than our parents did. Home ownership rates among adults under 35 are roughly half the national average, at 34.1%, according to the Washington Post.

One of the reasons why? Student loans.

But paying off student loans and buying a home don’t have to be mutually exclusive

Buying a home can, can seem like a pipe dream when you’re facing down thousands, tens of thousand or even hundreds of thousands in outstanding student loan debt. Students who graduated in 2016 owe an average of $37,172 in student loans, according to industry research.

Debt-burdened Americans  are understandably squeamish about taking on mortgage debt on top of what they already owe.

But paying off student loans and buying a home don’t have to be mutually exclusive. In fact,it’s normal to have multiple savings goals, like buying a house and being debt free. Lenders are also used to dealing with prospective customers who have other forms of debt.

In short, buying a home while you’re paying off student loans is within your grasp. It might take a little more effort, but you can absolutely start saving for a down payment while staying current on your student loan payments – if you use the right approach.

Here are some things you can do  to become a homeowner while paying off your student loans.

Choose your city

We can’t always choose where we live. Jobs and family obligations can often dictate where we land and where we end up purchasing a home. No matter where you decide to buy, researching your options is key.

First, get a firm idea of how much your dream home costs in the areas you’re looking to move to. Take a few weeks to browse real estate listing sites such as Trulia or Zillow, attend open houses, and check out what people are saying on chat boards in each city. If you’re looking to move just a few miles away, it’s still worthwhile to talk to homeowners in the area. All of this should allow you to come up with a rough estimate of what your ideal home will cost.

The national average for a house is currently $205,100. But there’s a wide range of prices depending on your state and locale. For example, the median value of a house in Seattle, Washington was $708,000 and  $136,000 in Columbus, Ohio, as of December, 2017, according to Zillow.

Think about your down payment and other costs

You need to have a specific dollar amount in mind to start saving for a down payment. Working towards a concrete number will keep you from either significantly under or over-saving.

Then, think about how much you want to put down on your home. While the minimum down payment for a conventional loan is typically 20%, it can reportedly be as low as 5%. By contrast a Federal Housing Administration (FHA) loan only requires a 3.5% down payment. FHA loans are backed by the government, so banks and other mortgage lenders will be more willing to take customers with more modest means or less than perfect credit.

Because FHA loans accept customers with a credit score as low as 580, lenders charge a monthly mortgage insurance premium and overall higher interest rates.

If you can’t afford the standard 20% down payment, and you can only put down 5% to 10% of the total cost, then lenders will charge you private mortgage insurance (PMI) every month. That can cost annually between 0.3% and 1.5% of the total loan, according to Bankrate.com. You’ll pay this in to addition to your regular mortgage payment, until you reach 22% equity in your home.

On a $200,000 home with a 5% down payment of $10,000, that would be an extra $79.16 per month, or $950 a year, assuming PMI of 0.5%.*

You’ll need to save for more than just the down payment, however. The mortgage lender will also charge closing costs, which is what you pay to finalize the loan. These costs usually range between 2% and 5% of the total loan, and can add thousands more to the final amount. Home inspections are optional, but highly recommended so you don’t buy a lemon. These typically run from $200 to $400 or more, depending on the size of the home.

Make sure you also calculate moving fees, new furniture and other expenses. If you want to make any immediate changes to the home, like painting the bedrooms or finishing the basement, include those estimates in your budget.

Start changing your payment plan

Struggling to find enough money in your budget to stash away? Try lowering your student loan payments and putting the difference toward your down payment.

People with federal student loans can often change their payment plan to an extended or income-based one, which will lower your monthly payment. If you’re currently on the standard 10-year term, you can lower your monthly payment by switching to an income-based plan.

These lower monthly payments can allow you to save more toward a down payment. The only downside is that borrowers will pay more in interest while on this plan, and it can stretch out your repayment by years.

As soon as you you’ve purchased your home, you should switch back to the previous plan.

Important note:  People with student loans from private providers might not be able to alter their repayment plans. Nevertheless, they should still call their loan servicer to ask.

Some mortgage lenders will even allow you to roll your student loans into your mortgage. This can simplify your payments and make it possible to get a mortgage while still having student loans. There are cons to this approach, however.

One downside is that while you can often defer payments on your student loans, you can’t do that once your educational loan becomes part of mortgage. (Late payments on your mortgage can lead to default, and potentially the loss of your home.) You should definitely consult a tax specialist if you intend to roll your student debt into your home mortgage, and for any other questions about home ownership.

Automate toward your goal

Keeping your down payment fund in your everyday checking account is like storing cookies on the countertop. If you see that huge wad of savings, you might be tempted to spend it. To avoid that impulse, my husband and I put our down payment in a separate savings account. We can’t write checks from it, and even though the interest rate is low, we do get a few bucks every month that we wouldn’t in a regular checking account.

You can also set up an investment account, with an eye on taking the money out in 5 to ten years. There’s market risk when it comes to investing vs saving but you’d be able take advantage of compounding and dividends. Just don’t forget you have to pay taxes on your gains when you’re ready to use it for your down payment.

Set up automatic transfers

My husband and I currently use automatic transfers to save for our down payment. Every month, we move $1,800 from our general checking account to our payment fund. We use two different banks – one for our everyday checking and the other for our long-term savings goals, including our down payment.

Setting up the transfer only took a few minutes, but it’s been key to making sure we save consistently each month–and we’re no longer tempted to spend our down payment savings on a new purse or TV.

I love seeing the balance grow every month and knowing that each dollar gets us closer and closer to our dream of owning our own home.