When Should You Start Saving for a Home?

ThinkstockBy Suze Orman

Q: My husband and I are in our early 30s, and after living expenses and debt payments, we have $1,500 left over each month. Our plan is to put this first toward credit cards (we owe $6,000) and then toward an emergency fund. Once we're out of credit card debt and have savings in place, should we put that $1,500 toward the $175,000 we owe in student loans? We'd like to save to buy a home--is that a financial no-no until we're completely debt-free?

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A: Wow, your combined student loans are more than the median price for a home these days (about $172,000). You already have a huge mortgage, but it bought both of you a college degree, not a home.

Before we talk about those college loans, I want to applaud your paying down credit cards and building an emergency fund. You are speaking my language, girlfriend. The only tweak I'd offer is to split the extra $1,500 between debt and savings each month. You'll still have your credit cards paid off in about eight months, and starting a safety cushion can't wait.

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Now let's talk about your plan's next phase. The four-year limit on undergraduate federal Stafford loans for dependent students is $31,000, so I'm guessing you have private student loans. I want you to focus on paying those down, even if it means delaying the home purchase for a few years.

One problem with private loans is they typically have a variable interest rate. Right now interest rates are very low. But with $175,000 in debt, you will be making payments for a long time, and eventually rates will rise. With these loans, you also need to be vigilant about making timely payments; as with credit cards, one late payment is the only excuse a lender needs to jack up the rate.

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Your college debt will play a big role in whether you even qualify for a mortgage, and in the loan terms. One of the most important factors banks consider is your debt-to-income ratio. As a general rule, they don't want housing payments to be more than 28 percent of your gross monthly pay, and a mortgage shouldn't bring total debt to more than 36 percent. Estimate what your mortgage payment might be for a home in your area, then add that to what you pay each month for student loans and any other debt. If that figure is higher than 36 percent of your monthly salary, you know that decreasing your debts is the necessary first step before you focus on buying a home.

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