Reader Case Study: Student loans and down payment - We need guidance, please!

[Growing the Stash]

Hello fellow Mustachians,

     I have recently started reading MMM and it is the first personal finance blog that I found that has actually made it seem as though early retirement (not as early as MMM, though) is within reach. The lady and I want to make the right moves to plan for our future. But we are not sure as to what to do. 'Ask a Mustachian' seems like the right place to seek help. First, find our situation below:

Me:
Age: 29
Income $51,250 yearly plus a 10K annual bonus
Occupation: Support Manager
Commute: Work from home
Debt: Only source of debt is a student loans - 62K. The interest rate on the highest loan is 5.75% ($4,500). This loan will be paid off by the end of February after which the interest rate of all remaining loans will be below 5%.
My loans are currently $600 a month, but I pay $1,100.
Savings: 7K - outside of paying extra to my student loans, I save $500 a month.
Before student loan payments I can live on less than 50% of my pay.
401K: 16K. I now contribute 7% and my company matches 4%.
FICO Score: 650 - before I committed myself to lowering my debt I had just over 100K between student loans and credit card debt. I was able to get my total debt down to 65K (car loan included) in just over 2 years by settling 25K of credit card debt (from college days for living expenses, terrible) for 8K. I also accelerated my student loan payments in order to eliminate my highest interest rate loan which was 9.25% ($8,000). In the process, however, my credit score to a big hit.

The Lady:
Age: 27
Income: $60,000 (it is a start up and so she must buy her own health insurance and there is no company 401K).
Occupation: Marketing Manager
Commute: Work from home
Debt: No Debt!
Savings: 10K - before retirement savings, she can save $1,600 per month
She is able to save just over 50% of her pay now.
401K: 11K
FICO Score: 822

We currently pay $1021 in rent living in The South. We have one car (2010 - 3K left on it, but it will be paid in full this year). We have zero commute because we work from home. Our goal is to own a home with a good amount of land in the country (about 5 acres) where we can grow our own food and frolic. (I grew up on a farm and so I have experience in this area). Continuing to work remotely would be ideal for this, but we do not know how long we will work for these companies and so we may need to find local jobs.

We are factoring that the home/property we would like to buy is 200K and so we would need a downpayment of 40K; we could get this together in 12 months.

We are both expecting tax refunds this year of about 3K (each) and I should be receiving a 10K bonus next month.

So onto the questions:

1) Should I pay more of my student loan debt before buying a home?
2) Should we buy a home in the city in case we need to find local jobs?
3) If 'yes' to question 2, what do we do about our dream home in the country?
4) How should we invest our money?
5) How should we invest our savings for a down payment?
6) How will our credit scores affect our ability to obtain a mortgage?

[LadyStache]

Why is your credit score so low? Do you have late payments on your report? Short credit history? Paying down more of the student loan debt might help increase your score since it decreases your credit utilization ratio.

As far as whether to live on the city or not, I think that would depend on how likely it is that either of you would change jobs in the near future. If it's highly likely, you should compare the costs for both prospective locations (lower commuting expenses in the city versus increased home price or increased property taxes, etc.).

[Growing the Stash]

Hi,

     My credit score is low because I had to miss several payments in order to save enough money to negotiate a settlement (I took a big hit, but it saved me 17K). When I first did this it was under 500. It has come quite a long way in a relatively short time.

[Blonde Lawyer]

You might not need $20k down. I think we did 5% down (not first time home buyers either) with lender paid PMI and a 3.875% interest rate.  We bought before my student loans were paid off.  We wanted to lock in while the market is buyer friendly and interest rates are low.  We know we are staying where we are for quite some time.  Our mortgage wasn't much more than our rent so it was kind of a no-brainer for us. 

[Growing the Stash]

5% down?! That is very unMustachian. But you seem like an advertisement anyway...

[Growing the Stash]

Anyone else?

[KBecks2]

Are you married?

[Growing the Stash]

We are not married, but only because of a mutual dislike for the institution. We have been together for over 5 years and are in it for the long haul.

[Blonde Lawyer]

Sorry it took me awhile to reply.  I'm not an advertisement just new to the forum side of MMM. I try only to post about things I have experience with which leads to posts about the same topic.  Anyway, the house buying thing is one place I don't agree with MMM.  I live in a state with low home prices but high real estate tax. Rents are generally higher than most mortgage payments. I could spend a few years saving a big down payment but I'd be paying a ton in rent during that time. The saved money would be earning hardly any return.  The house we bought also had instant equity. The previous owner had value priced it bc they already moved and needed the money tied up in the house stat.  We bought it for a good amount below appraised value.  I totally respect that others aren't comfortable taking our route. The most common reason for 20% down is to avoid PMI so I just wanted to make sure you were aware of other options that avoid PMI.

[waltworks]

Assuming you don't hate where you live now, you should be able to buy a house with cash in 3 or 4 years. Just keep doing what you're already doing, and try to fix that credit score too.

-W

[Growing the Stash]

There is not much that I can do to fix the credit score (of which I am aware) other than time.

My other concern with waiting to buy a house would be that interest rates will likely go up. I think we could come with a good portion of the money in 3 years, but certainly not the full amount.

[MDM]

1) Should I pay more of my student loan debt before buying a home?
2) Should we buy a home in the city in case we need to find local jobs?
3) If 'yes' to question 2, what do we do about our dream home in the country?
4) How should we invest our money?
5) How should we invest our savings for a down payment?
6) How will our credit scores affect our ability to obtain a mortgage?

1.  Somewhat depends on "how much below" 5%, and how highly leveraged you would like to be (and mortgage lenders will allow you to be).  If the SL interest rates are 2%, that's not as big a deal as if they are 4.8%, but total debt will matter.
2.  Greatly depends on the likelihood that you will keep your current jobs.  Are you looking for new jobs now "just in case"?
3.  See #2.
4.  Maximize tax-advantaged savings (401k and IRA) as much as you can.  See http://www.madfientist.com/retire-even-earlier/.  Also see the spreadsheet here if haven't already analyzed your cash flow to see how much you could invest.
5.  Money you expect to need soon should be in something safe, such as GE Capital or Ally or other online bank that will get you ~1% interest.
6.  Only to way to know for sure is to ask some lenders.

Good luck!