What Homebuyers With Student Loan Debt Should Know
As the cost of attending college continues to rise, more and more students are taking out loans to help cover the costs. The class of 2015 had the most student loan debt in history, with more than 70% of students graduating with loans that average over $35,000.
Unfortunately, student loan debt extends long after graduation; many graduates are still paying off loans into their late twenties and thirties – if not longer. Because of this, more and more young professionals find themselves ready to buy a home when they still have student loan debt. While having student loans doesn’t make it impossible to qualify for a mortgage, there are things that every homebuyer with student loan debt should know.
The Debt-to-income ratio, or DTI, is the formula that lenders use to determine whether or not a couple can afford a mortgage payment. This number is found by dividing debt payments, including student loans, car loans, and minimum credit card payments, by income. For example, if a couple earns $5,000 per month and has $1,600 in debt payments, their DTI would be 32%.
Typically, banks look for potential homebuyers to have a DTI less than 36%. DTI is also used by banks to help determine the monthly payment buyers can safely afford, which in turn influences the purchase price of a home for which buyers can be approved.
If your DTI is higher than 36%, don’t be discouraged. There are three ways to lower your DTI: increase your income, reduce your debt, or lower your target monthly mortgage payment.
While it may not be possible to immediately increase your income, it is often possible to reduce or move around debt. For example, a loan that is going to be paid off in 10 payments or less may not be counted against you on the DTI. Likewise, paying off student loans or credit card debt with a private loan at a lower interest rate can be another way to help lower a high DTI score.
Managing your finances
In addition to your DTI score, having stable finances can help improve your chances of being approved for a loan. FICO scores are also an important part of painting a complete financial picture because they include things like bank statements, histories of rental payments, or retirement savings and investments.
While being in debt can be a negative, it is not as important as a consistent history of paying bills on time. “Keep your credit history as clean as possible,” said Mike Mahoney, the chief underwriter at Genworth Mortgage. “It’s a lot easier to do that than to try and repair it.”
Although having student loan debt can make purchasing a home more difficult, it is not impossible. By managing your debt and finances, showing a stable financial history, and managing your monthly expenses you may be able to purchase a home sooner than you think.