Wanted: First Home, Fewer Debts Lured by sweet housing prices and the lowest mortgage rates in 15 years, two young doctors want to start bidding -- fast. But they fear that their enormous student loans will scotch any deal.
(MONEY Magazine) – Last July, shortly after Lauren Davis, 33, and David Toups, 29, became engaged, they decided to reverse the traditional order of nuptial events by buying the nest before cooing ''I do.'' The New Orleans couple, both physicians, have set their wedding date for May. But they aim to move out of the $450-a-month, two-bedroom apartment they share and into a house by April. Originally, their decision was motivated by personal reasons. ''I'd like to get pregnant on our honeymoon,'' says Lauren, a straight talker who adds that she wants five children. ''And it would be nice to have the move over with.'' But the couple recently started serious house hunting for some timely financial reasons. For one thing, they expect their combined 1992 income to top $140,000: he makes $30,000 as a resident in emergency care medicine and an equal amount by moonlighting; she pulls down $31,000 as a fellow in pulmonology, treating diseases of the lungs, and $50,000 from outside medical work and state aid. Accordingly, the two are desperate for a tax shelter. They estimate that deducting mortgage interest and property taxes could cut their 1992 federal tax bill by about $3,000. Beyond their personal financial concerns, however, is the clincher: a combination of moderate house prices and the lowest mortgage rates in 15 years. ''We might have waited longer to buy a house,'' David says, ''but it's such a good market right now.'' To top it off, President Bush has proposed a tax credit of as much as $5,000 for people buying their first homes between Feb. 1, 1992 and year's end. There's one big hitch on the couple's road to home ownership, though. Lauren and David carry a crushing debt load: $229,695 between them, mostly for student loans at rates of up to 13.5%. (Obviously, they welcome the President's plan to make all student loan interest paid after July 1 tax deductible.) Still, if the stork visits in the coming year, the couple will be compressing three major life changes -- marriage, a mortgage and parenthood -- into one intense period. They'll almost certainly need to stop their carefree spending. Though a bit edgy, they feel confident about bringing it all off. Says Lauren: ''I think we can handle a house and kids.'' Certainly this is an ideal time for them to become homeowners. Today's market strongly favors buyers, especially couples who don't have to unload an existing residence in the current soft real estate environment. In New Orleans, the market has actually begun to turn up: The median-priced home sells for $73,800 today; that's up 7.1% in the past 12 months, though still well below the $101,900 national median for previously owned houses. The combination of reasonable prices and fixed-rate, 30-year mortgages averaging around 8.6% (as low as 5% for adjustable-rate loans) has created a rare opportunity for renters long priced out of the market. Lauren and David plan to hang on to the house they buy at least until their children -- he thinks three would be fine -- are all in school. Their ideal home is a simple one: plenty of light, hardwood floors, a big backyard. They figure to pay about $150,000. It could be a two-family house that would let them rent out one unit and earn an extra $500 to $800 a month. And -- oh, yes -- the place should be in move-in condition, since the pair don't expect to have the time or cash to do much repair work. Lauren and David plan to get a fixed-rate mortgage, so they can easily budget for the monthly payments. Like roughly one-third of first-time buyers, Lauren and David will rely on relatives to help them with the cash they expect to need at closing -- in their case, $20,000 to $25,000. The couple plan to put 10% down, using the $11,000 in their credit union accounts, plus another $4,000 or so they anticipate saving. They will also borrow $10,000 at 8.5% for five years from the college fund already set aside for David's younger brother Michael, a high school junior. ''It was Michael's idea,'' says their mother, Isabel, a sales manager at a condominium complex in town. Even as they borrow more from Michael, Lauren and David are working down their earlier loans by about $1,600 a month. Because she is responsible for about 85% of the debt -- $193,337 in premed and medical student loans, plus $1,000 on her 17% MasterCard -- Lauren pays the lion's share of $1,400 a month, about 20% of her monthly gross income. David owes $4,000 on cash advances he took on his 12% Visa card for Lauren's 1.06-carat diamond-and- platinum engagement ring, along with another $31,350 in student loans (most at 9%) and a 12% car loan. Now the couple, who have no investments, wonder if their huge debts will prevent bankers from granting them a mortgage.
Whether or not the stork visits in their first year of marriage, both Lauren and David are on a tight professional timetable. She just started a fellowship in pulmonary/critical care at Louisiana State University with clinical work at nearby Charity Hospital, where she also completed a residency in internal medicine in June 1991. David finished one residency in internal medicine at Charity and is starting a second in emergency care. His average workweek, including moonlighting in other emergency rooms around the city, is 80 to 100 hours long; she puts in 60 to 80 hours. Both will finish their medical training in June 1994 and plan to establish separate practices in town after that. One prospective asset makes David and Lauren highly appealing to lenders: their future earning power. Within three to five years, the couple's joint income could top $330,000. Like many young professionals with rising incomes, the couple have already begun loosening their formerly tight grip on expenses. Last year they treated themselves to $8,000 worth of vacations, including a monthlong jaunt to Thailand and Singapore and two weeks on Costa Rican beaches. Their flings gave them a chance to celebrate their new romance. The young doctors met at Charity in late 1988, though Lauren, then an intern, initially snubbed the senior medical student when he flirted with her in the emergency room. ''I was overworked and seeing someone else,'' she recalls. But in July 1989, they began dating. Three months into the courtship, she asked him to marry her. ''Too soon,'' he replied. The couple stayed together anyway, and last March he gave her an engagement ring over dinner at a local Creole restaurant. Lauren cried; the waitresses applauded. Her parents will foot most of the bills for the 250-guest wedding, estimated at $11,000, though Lauren is ! paying for her $1,600 wedding gown. Both David and Lauren come from medical backgrounds. The son of a New Orleans surgeon, David always liked science and math -- and people. ''I was a real good bartender during college,'' he recalls. Tending bar and waiting tables helped cover the bills at Louisiana State University. But free time was in shorter supply once he enrolled in LSU's med school, so David stopped working and started borrowing. His fiancee, born in Danbury, Conn. near where her father is an executive at a ball-bearing company, followed in her mother's and grandmother's footsteps by becoming a nurse. She graduated from Western Connecticut State University in 1980, but dropped out of its premed program. After nursing for several years at the Yale Psychiatric Institute in New Haven, Lauren enrolled at Columbia University in New York City to pick up the premed requirements that she'd missed. Her parents let her live at home for free, but Lauren took responsibility for the tuition and future medical school bills. She got her M.D. in 1988 from the University of Chicago and headed for the Charity Hospital internship. Starting last November, the couple began spending what little free time they had house hunting. By year-end, they'd tramped through about 40 front doors in the quest for affordable perfection. They concentrated their search in the Uptown section of New Orleans. Houses there are less imposing than the Greek Revival mansions in the adjacent Garden District. But the neighborhood's two- to four-bedroom Creole cottages, often laden with gingerbread, have ample charm. On one recent Sunday, Lauren and David roused themselves out of their apartment and set out to look for their future palace. They started by walking through a $110,000 renovated two-family house known in New Orleans parlance as a shotgun double, named for the line-up of the rooms in parallel lines front to back. Within 10 minutes, they decided that clumsy interior renovations had spoiled the property. Back in the car, they drove on for a repeat visit to a $140,000 Victorian cottage. ''But it doesn't have a real backyard,'' Lauren complained. ''It has a large brick patio,'' David countered. In private moments, David and Lauren admit that the house aside, their upcoming wedding is making them a bit concerned about the merger of their finances. For example, once married and mortgaged, one partner would become responsible for a huge burden of debt if the other died or became disabled, ! and they have no disability or life insurance coverage. Lauren is especially nervous. She was in two car accidents in the past 16 months. In November 1990, she fell asleep at the wheel on a predawn drive to the hospital, breaking her nose. Afterward, she suffered a post-concussion syndrome, when she felt somewhat disoriented and had to take off work for a week. ''That really frightened me,'' she says. The young doctors glumly realize that they need to begin cutting expenses to pay for the house and insurance. ''I'll spend more time in the kitchen,'' Lauren resolves. David smiles. After all, they're still dreaming of a two-week honeymoon in either Italy, Greece or the South Pacific. ''Keeping out of the red is going to be a tough balancing act,'' he says.
BOX: THE ADVICE
Becoming Homeowners The problems Paying off debt, financing a house, merging their money in marriage
The solutions Clean up your balance sheet. When, at MONEY's request, David totaled the combined debt that he and Lauren now shoulder, the couple were shocked to learn that it exceeds $229,000. Richard Wolcott, president of Wolcott Mortgage Group, a New Orleans mortgage banking firm, said that to make themselves more attractive mortgage candidates, the couple need to lower the interest rates and monthly payments on their highest-cost debt, such as Lauren's 17% MasterCard and David's 12% car loan. Wolcott suggests they use the 8.5% loan from David's brother to pay down these debts. Financial planner Nancy Penton, president of Penton Financial Services in River Ridge, La., also said the couple could cut their monthly student loan payments as much as 45% if they refinanced the costliest loans through the Student Loan Marketing Association, which is a federally chartered company known as Sallie Mae. The Sallie Mae debt-consolidation plans, called Smart Loan Accounts, are available to borrowers with $5,000 or more in eligible loans, at least one of which is owned by Sallie Mae, or whose loans are held by lenders that don't offer loan-consolidation plans. (For more information, call Sallie Mae at 800-524-9100.) Penton estimates that a $39,500, 25-year Sallie Mae consolidation loan at 9% would save the couple $269 a month. Penton also urged the couple to halve their vacation expenses in 1992. She said that the $4,000 saving, plus the extra dollars gained from loan refinancing, ought to go into an emergency fund in their credit union, equal to at least four months' living expenses. Set roughly $150,000 as a maximum house price and keep the down payment low. Wolcott confirmed Lauren and David's feeling that $150,000 was about the most they could afford. To arrive at that figure, he used two ratios used by many mortgage lenders: First, the total monthly mortgage payment -- principal, interest, property taxes and homeowners insurance (flood insurance too in New Orleans) -- should not exceed 28% of the pair's gross income. Second, their total monthly loan payments should not exceed 36% of their gross income. He also urged them to make a small down payment, thus providing the maximum mortgage interest write-off. Some lenders permit 5% down payments, though 10% is the minimum at most institutions. Putting down less than 20% will require the couple to buy private mortgage insurance, costing about $70 a month. Both Wolcott and Penton advised against buying a house with a rental unit. They felt that managing such a property would mean too much hassle for them and a loss of privacy for busy doctors with limited time off. Get a fixed-rate mortgage. Wolcott agreed with the couple's plan to snag a 30-year fixed loan at 8.6%, for which they would probably have to pay a loan- origination fee equal to 1% to 1.5% of the mortgage amount. But in today's buyer's market, Wolcott added, they may not have to pay discount points (each equal to 1% of the loan amount). Adjustable loans have lower first-year interest rates of 5% to 6% right now, but their rates can typically rise by two percentage points a year to a maximum of 11% to 12%. ''It's tough to make a case for getting an adjustable loan unless you're planning to move within three years or so,'' Wolcott said. ''Why take on the risk of rising costs when fixed-loan rates are so low?'' Shop for insurance. Their heavy debt loads make it imperative for David and Lauren to protect their incomes by buying disability and life insurance coverage. Penton advised the couple to investigate policies offered by their medical societies. Disability group policies, for example, are often 25% cheaper than ones sold to individuals. Estimated cost of an individual disability policy: $1,200 a year for Lauren, $615 for David, who earns less. Penton advised each of them to buy $400,000 worth of term life insurance costing about $310 for Lauren and $370 for David. Hire a lawyer to write wills and title ownership of the house correctly. The couple can expect to pay about $300 for the service. Because Louisiana is one of nine community property states (the others are Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington and Wisconsin), an asset bought by a husband and wife is deemed to be owned equally by each of them. Either spouse automatically inherits the property upon the death of the other. But since Lauren and David plan to buy the house before getting married, each will own a separate half-interest. To protect each other's interest, said New Orleans attorney Carole Cukell Neff, both Lauren and David should make a will bequeathing each one's share to the other. After they marry, she added, the couple should formally designate the house as community property. In other states, it's generally best for unmarried couples living together to acquire their houses as ''tenants in common with the right of survivorship,'' so that when one dies, the other becomes the sole owner. No matter where you live, it's wise to discuss with a lawyer the best way to take legal possession of a house.
Shortly after talking to the advisers, David was completing the paperwork for a consolidation loan from Sallie Mae. He and Lauren were also investigating disability and life insurance policies. In early January, the couple saw a three-bedroom, shotgun double house in Uptown selling for $168,000. That day, they signed a contract for $156,000, with a 5% down payment. ''It was love at first sight,'' says Lauren. Now converted for single-family use, the house has a large yard with a view of the Audubon Park Zoo. As for their honeymoon, Lauren and David are considering less costly destinations.
BOX: A mountain of debt
With more than 14 years of costly medical training between them, Lauren, 33, and David, 29, recently started attacking their education loans. But to afford the house they want, they'll need to cut debt even more.
INCOME Lauren's earnings $61,012 David's earnings 57,287 Credit-card advances 6,100 Withdrawal from savings 3,000 Interest 362 TOTAL $127,761
OUTGO Lauren's taxes $20,048 David's taxes 19,992 David's loan repayments 16,226 Lauren's loan repayments 14,363 Vacations 8,000 Savings 7,500 Food 7,160 Entertainment 5,500 Rent 5,400 Car insurance and upkeep 5,228 Engagement ring 4,800 Clothes 4,240 Miscellaneous 3,480 Gifts, books, magazines 3,200 Medical insurance and expenses 2,624 TOTAL $127,761
ASSETS 1988 Honda Prelude, 1990 VW Fox $17,500 Credit union savings 11,000 Personal property 9,300 Checking accounts 1,200 TOTAL $39,000
LIABILITIES Lauren's education loans $193,337 David's education loans 27,501 Credit-card balances 5,000 David's car loan 3,857 TOTAL $229,695 NET WORTH -$190,695