Can I Buy A Home With Student Loan Debt?
One of the most common misconceptions in real estate is that it is impossible to buy a home with student loan debt. While carrying debt from student loans does impact a buyer’s ability to get a mortgage, it in no way excludes recent – or not-so-recent – grads from buying their first home.
While a monthly student loan payment may make it more difficult to save for a down payment, many first time buyers have student loan debt. A study by the National Association of Realtors found that the average first time home buyer in 2018 had an average of $30,000 in student loan debt. The following tips can help buyers understand the home buying process when student loan debt is involved.
Will student loans stop me from being approved for a mortgage?
Having student loans in and of themselves does not impact a person’s ability to get approved for a mortgage. What student loans – and other kinds of debt – do change is a person’s debt-to-income ratio.
A debt-to-income ratio, or DTI, compares a potential borrowers monthly debt to their monthly income. DTI is calculated by adding up recurring monthly payments, such as car loan or student loan payments; this is then divided by the gross monthly income, which is how much a person earns before taxes. Most lenders require a DTI of less than 43% before approving a buyer for a mortgage, while the preferred DTI for many lenders is below 36%.
For example, a recent college grad named Annie has a gross monthly income of $3300 and a recurring monthly debt of $1150. Annie’s DTI would be 35% – well within what is acceptable, even with student loan debt.
Do student loans affect my credit score?
Student loan debt can have a positive – or a negative – effect on a person’s credit score. Making on time payments each month can boost credit by demonstrating that the person pays back their loans on time. Unfortunately, making late payments can negatively affect credit score; while one late payment may not seem like a major deal, it can remain on a credit report for as long as seven years.
How can I reduce my student loan debt?
DTI too high to quality for a mortgage? There are several ingenious ideas to reduce student loan debt. One of the easiest – and most effective – ways to reduce debt is by paying more towards the loan each month. While this requires cuts in other areas of the budget, such as discretionary spending, new clothes, or eating out, paying just $100 extra each month can quickly help reduce the amount owed. This in turn will gradually improve DTI.
Another way to improve the chances of being approved for a mortgage is by consolidating or refinancing loans. The US Department of Education offers a loan consolidation program for federal student loans; this allows students to combine all their loans into one loan with a single monthly payment. While this does not reduce the amount owed, it can help reduce the amount of interest paid over the life of the loan – and make it easier to keep track of when payments are due.