It might be wise to weigh your options.
Have you put off buying a house because of your student loan debt? You’re not alone. A study conducted in 2018 shows that 45 million Americans owe more than $1.5 trillion in student loans. With mortgage debt on the rise as well, prospective homeowners have to wonder if buying a house while owing student loans is such a good idea.
Factors to Consider
If you’re planning on buying a house with student loans, here are some factors that banks and lenders rely on when deciding to issue a mortgage.
Understanding Debt-to-Income Ratios
Having student loans will not prevent you from applying for a mortgage. Banks or lenders will, however, look at your debt-to-income (DTI) ratios to determine your ability to take on a mortgage payment. There are two ratios to look out for, specifically front-end and back-end DTI.
Front-end DTI, or housing ratio, compares your monthly payments to your gross monthly income before taxes. Lenders prefer a front-end ratio of about 28%.
Back-end DTI is calculated by comparing the total debt obligation of the applicant to their gross monthly income. This includes credit card minimums, car payments, and student loans. Most lenders prefer a back-end ratio of 36%.
Student loans can raise your DTI ratios, but it is important to note that if you make enough to offset your DTI, your application won’t be negatively affected.
Credit Score & History
Contrary to popular belief, student loan debt does not lower your credit score. 35% of the FICO score calculation is dependent on payment history. So this means that as long as you make your student loan payments on time, that will be a plus point on your credit history.
Repayment Status
For student loan borrowers on deferment, it may be wise to wait until the deferment period has ended before applying for a mortgage. This is because banks and lenders will take into account the total amount you owe on your student loans when calculating your DTI ratios. This could negatively impact your DTI, as their estimated payment amount will more than likely be higher than what you actually pay monthly.
How to Buy a House with Student Loan Debt
Let’s look at some ways that you can prepare for the mortgage application process to improve your chances of getting approved.
Prepare to Make a Down Payment
The minimum down payment that most banks and lenders look for is about 3%-10%, based on your credit. The ideal amount is 20%, but not everybody can afford that. The smart move will be to plan a budget to put away money each month to be able to put down a larger down payment.
Pay Off Your Student Loans Quicker
One way to improve your DTI ratios is to make more than the minimum payment on your student loans. This will mean a more favorable DTI ratio which in turn means a higher chance of getting approved for a loan.
Enroll in an IDR program
If you would like to lower your DTI ratios but cannot afford to make higher payments on your student loans, you can enroll in an income-driven repayment (IDR) plan. IDRs are available for federal loans, and they can significantly reduce your monthly payments which in turn lower your DTI ratio.
Improve your credit score
It never hurts to give your credit score a boost, and you can do so by managing your debt in a responsible fashion. Keeping your credit utilization as low as possible, as well as keeping your accounts in good standing by making payments on time. This will show the banks and lenders that you have a history of on-time payments and good credit management skill.
Final Thoughts
In the end the decision lies with the prospective homeowner’s goals. Is it more important to you to save money on the interest by becoming debt free? Or is it more important to become a homeowner first, saving money on renting? The answers to these questions depend on the individual’s situation and resources.
If you decide that you need help with consolidating your student loans however, the Financial Helpers are ready to assist you.
