Episode 27: Buying vs. Renting with $80K of Debt!


Nate and Danielle respond to a listener question about buying a house when in $80k of debt but also looking at a large increase in income.

Show Notes

Listener question:

As my graduation is quickly approaching (in May!), my husband and I will finally have a more permanent income and our budget will become more stable and easier to track. My goal for us is to tackle the two big debts we have: our car loan + my student loans. Although the amount of these two debts is HUGE. Our goal is to tackle this head-on and really get these lowered and finally paid off in the next 2-3 years if not sooner. My masters and bachelors degrees have cost me a total of $40K in student loans. Our only car loan is also a total of $40K equalling a whopping total of $80K!

My question is….since I will be starting my career in a few short months and my income will be exponentially higher, would it be wise or not wise to consider buying a home with so much debt in our names? Would we even be approved? We are moving to Sacramento which is a much more affordable area in California and are mentally and emotionally ready to buy a home. I’ve been told I should pay off my student loans before even considering buying a home. However, I feel like we would be throwing away money just paying rent for an apartment…what are your thoughts?

General recap:

  • $40K in student loan debt
  • $40K in car debt
  • Plan to pay off in 2-3 years
  • Can we afford/should we buy a house

The numbers approach

The average house in Sacramento is $317K (link). This means that you will have a rough mortgage of $1,500 a month and therefore need to earn $5,000 to $6,000 a month according to our ratios (and this one too!). A monthly income of that size equates to a yearly salary of $80K-95K.

The idea here is to figure out how much you have to earn in order to afford an average house. All of our recommendations are based on living like the average person in your area.

Paying down debt

If you want to pay down all of your debt in 2-3 years you need to put $2,200-$3,500 a month down on your debt. We calculate that your current monthly debt payments are around$1,200 ($475 for student loans and $725 for car). This means that your total monthly output for home and debt will be between $3,700 and $5,000. If you are making in the range of the average salary needed to afford the average house, a 2-year payoff is not a possibility. If you are making more, than it may not be an issue. 3 years is aggressive but possible.

Buying a home

Based on all of our previous assumptions, these are the price ranges you should be looking at depending on income.

  • $80K salary allows a $220K house
  • $90K salary allows a $280K house
  • $1000K salary allows a $330K house

You will be approved for more than this. Don’t. Full stop. Your goal right now is to pay down debt and to setup for success down the road. Too high of a mortgage significantly damages this outcome.

Owning vs. Renting

Renting is actually cheaper than owning something. According to a CNBC report (link) it cost 63% more to own a home than to rent one in California. So you aren’t throwing money away but you also aren’t getting the benefits.

  • Tax deductions
  • Stable monthly payments
  • Being able to sell

You also don’t have any of the risks

  • Repairs
  • Liabilities

There’s no right answer. Renting allows you to be a bit more fluid in your decision making while owning gives you security. I don’t think that your debt should stop you from buying a house (assuming a healthy enough income) if that is what you feel ready for. Just make smart decisions and don’t get married to a house.

Our recommendation

We would rent for a year or so. This allows us to do the following:

  • Learn the area
  • Learn how to live with an increased income
  • Pay off debt

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