As an increasing number of millennials enter the housing market, a new issue looms: Can you buy a house with student loan debt? Buying a home is one of the biggest financial decisions a person can make, and having student loan debt can add an extra layer of complexity to the process. The good news is that 37% of first-time homebuyers have student loan debt. However, there are some important factors to consider before making the leap.
Review your financial situation: Before applying for a mortgage, it's important to take a good look at your current financial situation. This includes your income, expenses, and overall debt load. It's also important to have a solid understanding of your credit score and any blemishes that may affect your ability to obtain a mortgage. The role of your credit score in obtaining a mortgage cannot be overstated. It serves as a deciding factor for lenders in determining if you are a trustworthy borrower. The credit score also has a significant impact on the interest rate that you will be offered on the home loan. Generally speaking, those with good credit are eligible for lower interest rates. Improving your credit score can be done by reducing or eliminating debt, which also improves your debt-to-income ratio. (More on that coming up.)
To enhance your credit score before obtaining a mortgage, there are several steps you can take:
- Pay bills promptly or ahead of schedule
- Reduce your revolving credit by paying down or paying off credit card balances
- Avoid making major purchases
- Obtain a free annual credit report authorized by federal law to check for any potential red flags for lenders and work with the credit bureaus to correct any inaccuracies on the report.
Consider your debt-to-income ratio: Your debt-to-income (DTI) ratio is a key factor in determining your ability to obtain a mortgage. This ratio compares your monthly debt payments, including student loans, to your monthly income. To qualify for a mortgage, the Consumer Financial Protection Bureau (and most lenders) recommend a debt-to-income ratio of less than 43%. For example, let's assume you want a monthly mortgage payment of $1600. If you add that to your monthly student loan payment of $260 and a car loan payment of $140, your total monthly debt would be $2000. If your gross monthly income is $6000, your debt-to-income ratio would be 33% (2000/6000), which would meet the benchmark for a home loan.
Shop around for the right mortgage: Different lenders have different requirements when it comes to home loans, so it's important to shop around and find the right one for your situation. Consider talking to multiple lenders and getting pre-approved for a mortgage to see what you can afford before you start shopping for homes to buy.
Consider a government-backed loan: If you're having trouble obtaining a traditional mortgage due to your student loan debt, you might want to consider a government-backed loan, such as a Federal Housing Administration (FHA) loan. These loans often have more flexible requirements and can be easier for those with student loan debt to obtain.
Refinance your student loans: Refinancing your student loans can lower your monthly payments, which can make it easier to obtain a mortgage and reduce your DTI ratio. However, it's important to weigh the potential benefits against the potential drawbacks, such as the loss of certain protections or the need to pay higher interest rates over the life of the loan.
Increase your down payment: Having a larger down payment can help you obtain a mortgage despite your student loan debt. A larger down payment can reduce your loan-to-value (LTV) ratio and make you a more attractive candidate for a mortgage.
Consider a co-signer: If you're having trouble obtaining a mortgage on your own, you might want to consider getting a co-signer, such as a parent or other family member, who can help you qualify for a mortgage.
Buying a home with student loan debt is definitely possible, but it requires careful consideration of your financial situation and a thorough understanding of the mortgage process. By reviewing your finances, shopping around for the right mortgage, and considering options such as refinancing, increasing your down payment, or getting a co-signer, you can increase your chances of getting a mortgage and becoming a homeowner. Every homebuyer's circumstances are unique, which is why it's important to consult with a mortgage specialist who can present all of your available options and customize a mortgage plan specifically for you before you begin searching for a house. By obtaining a loan pre-approval, you will have a clear understanding of the amount of home you can afford and the means by which you can buy it. Whether you're moving and need the best relocation Realtor in Iowa, buying your first home downtown or looking for your own slice of heaven with one of the beautiful acreages for sale near Des Moines... Reach out to me today and I can help get you where you want to be!
