Your Degree or Your House

Jeff Banks and his wife went to Duke, and their dream of owning a home were dashed:

The house passed inspection, so we thought we were on our way to owning our first home. But then came time to get our mortgage. Since we were putting down less than 20 percent, we had to apply for a loan through the Federal Housing Administration. We didn’t suspect there would be any issues, given that we had been pre-approved.

But that’s when we made rookie mistake number two: believing that a pre-approval for a mortgage guaranteed we’d actually get a mortgage.

Apparently, the underwriters determined that our debt-to-income ratio was too high to get approved. While we knew we still had a lot of student loans to pay back, it hadn’t raised any red flags before, so we weren’t sure what was different now.

Then our loan officer explained: Because I was a contractor, they weren’t counting my income, which made it seem like our household income was about half of what it actually was. On top of that, they calculated Kelly’s monthly loan payment as if she were on a standard repayment plan, rather than on an income-based one.

That made her payments appear closer to $1,200 — more than twice the $500 she was actually paying. We were told that banks often did that to account for the possibility that payments under an income-based repayment plan could shoot up every year, which could hurt a borrower’s ability to pay the mortgage or be approved for future financing.

I am quite sympathetic, though not for the reason in the title of the article (“How a degree from Duke University dashed my dreams of buying a home“) Previously, I might have harped on that to the exclusion of everything else. Going to Duke and racking up that kind of debt is a choice. It’s fair to point out if they were told “attend the best schools [they] possibly can,” though a lot of us were never told that, at least in application to private schools. North Carolina has at least two fantastic public schools, and some really good ones on top of that*. To be fair, some of this is having a chip on my shoulder about (my perception of) how the people who go to a school like Duke look at people who go to schools like the one I went to, which may not entirely be fair but may not be entirely unfair, either. Ultimately, though, this goes to the bad advice they were given, rather than their accepting of the conventional wisdom (for which I will give them a pass).

It also provides a great reason, though, not to perpetuate the advice. Which is another bit of a chip on my shoulder. People complaining about doing “what they were told to do” and yet perpetuating the advice they were given, and expressing no regrets about the path they took. Banks says that he wishes his education had not been so expensive. It’s convenient for me that he and his wife went to Duke, however, because at least there isn’t an automatic recorded response to this about how states no longer support state schools anymore. Duke isn’t one of those. There is a lesson here, that price matters, and if you don’t think that spending a lot on college or the right college won’t limit future options, you’re sorely mistaken. At least when it comes to private schools (and very likely research institutions and more), that mistake is one of the factors allowing costs to rise.

But I said I wasn’t going to fixate on that, and I won’t. Because I am sympathetic. Partially because of a recognition of the shape that the economy is in for young people. But in good part because my wife and I are in the process of buying a home, and it’s utterly nerve-wracking. My wife just signed an employment contract where her annual salary will be approximately the size of the loan that we’re asking for (we’re making a large down payment), but the bank doesn’t care due to the specific formula they use. We’ve had to account for some strange debt collection dating back five years that the collection agency never even bothered to call us about. They wanted reference letters from each of our landlords over the previous two years**. We’re about as safe a bet as you can get, conservative to a fault, and we’re still waiting on pins and needles.

The bank’s interest in the non-low-income payment requirements on the student loan actually sounds good and proper to me, since that is the obligation. The part about his income not counting, while understandable from the bank’s point of view, does suck. In the same sense that it sucks that our bank seems mostly interested in her employment contract that is expiring in two weeks and uninterested in the one that picks up after that. In addition to sympathy over the nerve-wracking experience***, I am also sympathetic to having decided on a house and yet not being able to get it. We still face that possibility on the house that we’re wanting now.

But life does go on, and I do very much respect Banks’s outlook on it. Regardless of how they got where they are, they do seem to be doing all of the right things going forward. With that, it seems like the chances of them getting a good house are pretty good. It’s unfortunate that some miscalculations and the banks’ formula didn’t work out for them with this house.

* – I don’t know if they’re from North Carolina. Even if not, UNC and NCSU cost less. And chances are, there are some good – if not equally good – public schools in their own state.

** – We negotiated it down to a year. Mostly because I didn’t want them contacting these people, though I didn’t frame it that way.

*** – As well as their “rookie mistake” on not having a contingency clause on the inspection. We fortunately had a real estate agent who helped us prevent that. That came in very handy when we got a home inspection report that was 95 pages long. It wasn’t 95 pages of the word “very” in repetition in between “is in” and “good shape.”