How to Buy a Home When You Have Student Loan Debt

Most college students incur student loan debt to pay for their college degree. In 2017, 70% of college students graduated with a significant amount of student loan debt. Nationwide, the average student loan borrower has $37,172 in student loans.

Repaying thousands of dollars in student loans post-graduation can be an obstacle to pursue other life goals such as buying a car (the base price for a BMW 2-series is new Tesla Model 3 costs $33,8451), getting married (average cost of a wedding is $33,3912)  or buying a home (10% down payment on a $370,000 home is $37,000).

With the current average monthly student loan payment standing at $393, it’s not surprising that 83% of millennials who don’t own a home say that student loan debt is holding them back from purchasing a home. Though it may seem difficult, buying a home while carrying student loan debt is not impossible. If you want to buy a home while carrying student loan debt, here’s what you need to know before diving into the housing market.

Know All of Your Debt – Review Your Credit Reports

One of the major factors that can impact a mortgage application is your credit score. Student loans can have a positive or negative effect on your credit score. If you are making regular payments on time, the debt can have a positive influence as it demonstrates your ability to make regular loan payments. Here are another five actions that can impact your credit score:
  1. Pay your bills on time. Paying bills on time is a surefire way to build a solid financial reputation.
  2. Manage your credit utilization. The ratio of credit balances to available credit lines is your credit utilization. Keeping your credit utilization at around 30% or less will look better on your credit report.
  3. Don’t close old credit accounts. Keep old credit card accounts in good standing open, even if they are not being used as they help to establish your credit history.
  4. Use different types of credit. Show mortgage lenders that you can responsibly manage a variety of debts such as car payments, student loans, and credit cards.

How Do Student Loans Affect Mortgage Approvals?
When seeking financing for a new home, mortgage lenders are going to look at front-end ratio (the housing ratio), back-end ratio (all debt obligations in comparison to your income), credit history, assets, income, job stability, and the down payment amount.

Student loans can affect your debt-to-income (DTI) ratio, which affects mortgage financing options. DTI is a percentage that shows the amount of your monthly income required to repay your debt. Mortgage lenders prefer to see your DTI at 43% or lower.

4 Ways To Pay Off Student Loans Faster
  1. Lifestyle Changes: There is no penalty for increasing the principal payment to pay off your student loan sooner. Small lifestyle changes in your budget can assist you in saving more money for debt repayment.
  2. Increase Your Income: Finding a part-time job could bring in a little more income that you can use to pay down debt.
  3. Shorter Repayment Term: It is possible to change repayment plans to pay off students loans earlier than the standard 20 years. Talk with your student loan representative to discuss which options are best for you.
  4. Student Loan Refinancing: Private lenders and the government are both options for refinancing student loans for faster repayment. The government offers policies such as Student Loan Cash-Out Refinance, Debt Paid by Others, and Student Debt Payment Calculation to help make homeownership more obtainable to those with student loan debt.

Home Loans for Buyers with Student Debt
If you have a handle on your student loan and would like to pursue your goal of becoming a homeowner, there are mortgage options such as down payment assistance programs, low down payment home loans and home loans that offer 100% financing that can help you reach your goal of owning a home.
  • Federal Housing Administration (FHA): FHA home loans allow down payments of as little as 3.5% for borrowers with a credit score of 580 or higher. FHA home loans allow you to use certain types of gift funds for your down payment and closing costs.
  • Fannie Mae HomeReady Mortgage: Eligible borrowers are required a have a down payment of 3%.
  • VA Home Loans: Veteran and active duty homebuyers are eligible to apply for a VA home loan. Eligible veterans can apply for a 100% home loan up to the current loan limit with no down payment. The seller or builder is allowed to pay a portion of the veteran's closing costs, too, which could make the total cash required to purchase, in some instances, zero.
  • USDA Home Loans: Home buyers with a minimum 620 credit score and a low- to moderate-income can purchase a home in one of the USDA’s eligible rural areas with no down payment required.

Are You Ready To Become A Homeowner?
Are you ready to take on the financial responsibility of owning a home? Are you comfortable carrying more than one high-balance debt for what could realistically be 20+ years? Are you confident that your job will provide a stable source of income to cover your lifestyle and debts?

When answering these questions, it is important to review your priorities and what matters most to you. Whether it is better to continue living with your parents, paying rent or jumping into the housing market, consider all of your options. Contact a Certainty Home Loans mortgage professional in your state to get pre-qualified. He/she can review your credit score and debt-to-income ratio so you’ll know how much home you can afford.

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