How to buy a home if you have student loan debt
More young adults than ever are leaving college with student loan debt; an estimated 44 million Americans collectively owe nearly $1.5 trillion in college loans. While traditional wisdom says not to buy a home until you are debt free, this may not be an option for those with lots of years left to pay on their loans. This guide can help you prepare to buy a home – even if you have student loan debt.
- Fix your credit score.
Student loan debt doesn’t affect your credit score as long as you make monthly payments on time; in fact, a history of regular payments can actually help improve your score. Carrying different kinds of accounts, such as auto loans and credit cards, combined with on time payment history for bills can keep scores up as well.
- Improve your debt-to-income ratio
Debt-to-income ratio, or DTI, is how much of your income is spent repaying debt. Most lenders follow the 28/36 rule; this means that no more than 28% of your gross monthly income should be spent on housing, and no more than 36% should be spent on debt service – including a mortgage. Decrease your DTI by paying as much as possible towards your loans, taking a second job or side gig, or consolidating and refinancing student loans to reduce payments.
- Look for loan assistance
There are several types of loan assistance programs available depending on where you live, military service, and more. USDA loans can be given with zero down in some suburban or rural areas, while VA loans are available to those who served in the military. Down payments, closing costs, and other fees associated with home buying cannot be included in the loan. Ensure you have enough savings to cover these costs, or consider investigating local, state, or federal assistance programs for additional help.
- Get pre-approved first
Before going to your first open house or scheduling any showings, ensure you are preapproved. Not only is this the first step towards securing a mortgage, but a letter of preapproval from the bank will also include how much you can afford; this can help you stay within budget when searching for your first home.