Buying a house with student loan debt might seem out of reach for many people. But the reality is, your student loan debt shouldn’t hold you back from home ownership. Before you decide to take the leap, sit down, review your priorities, and make sure you are ready to take on this responsibility. Are you confident about your income? Is it large enough to comfortably take on a mortgage payment on top of your student loan payments? What other area of your life will have to be scaled back? Here are five things you’ll need to do when buying a house with student loan debt.
Even if you don’t have any other kinds of debt, your student loans can give you a high debt-to-income ratio. Refinancing your student loans or switching to an income-driven payment plan will help lower your payments, decrease your DTI ratio, and prove to a lender that you have the funds to make mortgage payments.
Before making that decision, be aware of the trade-offs involved with both options. If you choose to refinance federal student loans, they then become private loans. You will lose federal protections, including access to income-driven plans and federal forgiveness programs. An income-drive plan will cap your payments at a percentage of your income. If you choose this route, the amount of interest paid will increase over time because the term length will be extended.
Generally, mortgage lenders won’t care if your overall student debt increases, their primary concern is your monthly payment. But to save the most on your student loans, you’ll want to minimize the amount of interest you pay over time.
The biggest thing that lenders look for when deciding whether to approve you for a loan is your credit score. Here are a few ways to boost your credit score ahead of applying for a mortgage:
This is the most important factor in your credit score. If you pay on time and in full you can build a solid financial foundation.
Closing a credit card account might seem like an easy fix when trying to build your credit score, but often that’s not the case. An old account in good standing can help your credit. The longer your credit history and average age of your accounts, the better.
A mix of revolving credit (as credit cards) and installment loans (car payments or student loans) show you are capable of handling different types of credit.
The ratio of your credit balance to your total available credit is your credit utilization. Ideally, you want to manage your credit utilization so you aren’t using more than 30% of your available credit.
Buying a home involves more than just taking on a mortgage – you’ll also be responsible for paying the down payment and closing costs upfront. Closing costs include home insurance premium, title fee, mortgage insurance, mortgage loan origination, and the home inspection. Overall, closing fees cost the average home-buyer about 2%- 5% of the total cost of the home’s price.
Traditionally, a down payment is about 20% of the cost of the home. But today, buyers have other options such as putting less down and paying for private mortgage insurance monthly until building 20% in equity. Just be aware, the less you put down the more you’ll pay in interest.
There are several down payment assistant programs that lenders will accept. Look into whether your state or city of residence may offer down payment assistance programs. It’s also possible to take advantage of federal loan programs – even though you already have a student loan, you could qualify for an FHA loan. This could mean a down payment of as little as 3.5%. If you choose to buy your home in a more rural area, you could qualify for a USDA loan which does not require a down payment at all.
Research your options and talk to an experienced mortgage broker to find out what programs you may qualify for at the federal, state, and local levels.
Taking your time is the most important piece of advice that we can offer. When you make the decision to buy a home, it’s easy to get carried away. You might think you need to buy a house right away, with all the amenities and appliances you’ve ever dreamed of. But chances are, it’s not in your budget. Be aware that as a first-time home buyer, you’re likely buying a starter home which you will eventually grow out of.
Spend time analyzing what you’re looking for in a house, what are you needs and wants, what kind of neighbors would you like to have, and what can you realistically afford. When it comes to price, consider the 28/36 rule. 28 refers to the percentage of your gross monthly income that you should spend on your monthly housing costs. And 36 refers to the total debt payments you make – including your mortgage.