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Student loans are a huge part of the financial landscape in the United States. As of 2018, there were 1.6 million borrowers with federal student loans who owed more than $100,000. That’s a lot of debt—and it can be stressful to look down the line and see how far you have to go before your loans are paid off and your credit score is back to normal.
However, student loans don’t have to weigh you down for years on end. Once you’ve graduated from college and started earning an income, you can use some of that money to pay down your student debt. In fact, many lenders will let you pay off your student loans faster by making extra payments or using a home equity line of credit (HELOC).
But what if you want to buy a house? Will your student loan debt affect your ability to qualify for a mortgage? The answer is yes—but not in the way you might think.
When applying for a mortgage, lenders look at two things: your income and your debt-to-income ratio (DTI). Income includes all money coming into your household each month; debt includes all loans
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Can I Buy a Home If I Have Student Loan Debt?
Buying a home is often a challenge, but especially in a boiling-hot housing market. There were 2.1 million more homeowners in the 2020 fourth quarter compared to a year ago, according to the Pew Research Center. Among other factors, the record-low interest rates helped convince buyers to take the leap in home ownership.
Getting a mortgage can be more challenging if you have outstanding student loans. But by taking a few extra steps, you can increase your chances of qualifying for a loan.
Keep reading to learn how to get approved for a home loan with student loan debt.
Compare Personalized Student Loan Rates
Personalized Student Loan Rates
If you’re a student looking to borrow money, you may be wondering what the best option is for you. Personalized Student Loan Rates allow you to get a customized quote based on your needs and qualifications. By getting a personalized quote, you’ll know exactly how much you’ll need to repay when it comes time for repayment.
What are Personalized Student Loan Rates?
Personalized Student Loan Rates are loans that allow you to receive a personalized quote based on your needs and qualifications. This is different from other types of student loans because it gives you an accurate picture of how much money you need as opposed to just giving an estimated amount that might not always be accurate.
Why get a Personalized Student Loan Rate?
There are many reasons why someone would want to get this type of loan: they can help them see exactly how much they need to borrow instead of just giving an estimated amount; they can help those who have bad credit or no credit history get access to funds; and they can help students figure out how much they’ll need in order to pay back their loans after graduation (or while still attending classes).
How Student Loans Can Affect Your Ability to Buy a Home
If you’re like most college graduates, you left school with student loan debt. Student loans can be a heavy burden, but you may not realize how they can impact other areas of your life, including your goal of becoming a homeowner. Student loans can affect your ability to buy a home in the following ways.
1. Loans Can Increase Your Debt-to-income Ratio
When you apply for a mortgage, lenders will look at your debt-to-income (DTI) ratio: the total amount of monthly debt payments you have divided by your gross monthly income. Lenders use your DTI ratio to determine if you have enough income after satisfying your other obligations to afford the mortgage payments.
The max debt-to-income ratio to get a mortgage is 43% or less. If you have a significant amount of student loan debt, your minimum monthly payments may push your DTI ratio over the 43% mark, making it difficult to get approved for a loan.
2. You May Not Be Able to Save for a Down Payment
When you take out a mortgage, you typically have to pay a percentage of the home’s price as a down payment. According to a survey on down payment trends from the National Association of Realtors, in 2019, the median down payment was 12% for all homebuyers, but it was just 6% for first-time homebuyers.
If you were to buy a $250,000 home with a 6% down payment, that means you’d need to have $15,000 saved.
The Federal Reserve reported that in 2019, the typical monthly student loan payment was between $200 and $299, though some borrowers have much higher minimum payments.
Depending on your loan balance, staying current on your loans might mean that you don’t have much money left over each month. Without much breathing room in your budget, it can be difficult to meet lenders’ down payment requirements.
3. Late or Missed Payments Can Damage Your Credit
A common question borrowers have is: “Do student loans affect my credit score?”
Student loans can have a significant impact on your score—positive if you make timely payments every month, but negative if you miss payments.
According to the same Federal Reserve study, 17% of adults were behind on their student loan payments in 2019. While it’s a common problem, missing loan payments can make it even harder to qualify for a mortgage. Missing even one payment can dramatically lower your credit score, causing lenders to view you as a riskier candidate.
5 Tips for Buying a House With Student Loan Debt
While buying a home can be more difficult if you have student loans, it’s not impossible. If you’re wondering how to get a mortgage with student loan debt, use these five tips to improve your odds of getting a loan.
1. Check Your Credit
Before applying for a loan or even shopping for a home, review your credit report and look for any errors, fraudulent accounts or past-due items. You can check your credit reports from each of the three major credit bureaus for free at AnnualCreditReport.com.
Usually, you can only view reports from each bureau once per year at no cost. However, the credit bureaus are offering free weekly credit reports until April 2022 due to the Covid-19 pandemic.
To maintain or improve your credit, focus on paying all of your bills on time. If you have older credit accounts, such as credit cards, it’s generally a good idea to keep them open. The length of your credit history also affects your credit score.
2. Reduce Your DTI Ratio
If your DTI ratio is too high, you may struggle to get approved for a loan. However, you can fix that problem by paying down existing debt and boosting your income.
If you have multiple forms of debt, such as credit card balances, a car loan and student loans, try to pay off the account with the lowest balance first. By paying off an account, you’ll reduce your monthly payment obligations and improve your DTI ratio.
You can also reduce your DTI ratio by raising your income. Consider asking for a raise at work or picking up a side hustle to increase your monthly gross income.
3. Lower Your Student Loan Payments
You can free up more money each month—and reduce your DTI ratio—by lowering your student loan payments.
If you have federal student loans, consider applying for an income-driven repayment (IDR) plan. With IDR plans, your payments are based on your discretionary income and family size, and you could qualify for a much lower payment than you have now.
But when you use an IDR plan, know that mortgage lenders have specific formulas to determine how your student loan payment fits into your DTI ratio. That’s because your monthly payment amount on IDR can change year to year depending on your circumstances. These formulas can vary by lender. For example, lenders who make FHA loans use 1% of the outstanding student loan balance you’re repaying on an IDR plan as your monthly payment obligation.
If you have private student loans, you can lower your payments through student loan refinancing. When you refinance your debt, you may qualify for a lower interest rate or a longer repayment term and a smaller monthly payment.
4. Explore Your Mortgage Options
In general, financial experts recommend down payments of at least 20%, since that amount allows you to avoid paying private mortgage insurance (PMI). However, 20% isn’t a firm requirement, and is often difficult to have that amount of cash on-hand for most homebuyers. Depending on your situation, you may be able to buy a home with as little as 3% or less.
There are multiple types of mortgages that have lower down-payment requirements:
VA loans. If you are a military veteran, you may be eligible for a home loan made available through, and partially guaranteed by, the U.S. Department of Veterans Affairs. Qualified participants can get approved with 0% down.
FHA loans. Federal Housing Administration (FHA) loans allow first-time homebuyers to get loans with as little as 3.5% down.
Low-down-payment conventional loans. Some lenders are offering conventional mortgages that require just 3% down.
Fannie Mae HomeReady loans. This program is for low-income first-time homebuyers. If you qualify, the minimum down payment required is 3%.
5. Research State Programs
Depending on where you live, you may qualify for down-payment assistance programs. Some states even have special incentive programs for homebuyers that also have student loans. For example:
Kansas Rural Opportunity Zones: In Kansas, individuals that buy homes in select counties can qualify for up to $15,000 in student loan repayment assistance over five years.
Maryland SmartBuy: If you qualify for the Maryland SmartBuy program, you can buy a home and get up to $30,000 in student loan repayment assistance. One borrower, if two co-borrowers are seeking a loan, must be free of student loan debt to qualify.
Ohio Grants for Grads: Recent college graduates can get up to 5% in down payment assistance on homes they buy in Ohio. If you sell the home and leave Ohio in less than five years, you’ll have to pay back some or all of the assistance you received.
If you’re worried about juggling student loans and mortgage payments, you shouldn’t feel pressured to rush into homeownership. If any of the following scenarios are true for you, it may not make sense to buy a home right now:
You don’t have any flexibility in your budget. If your monthly budget is already stretched to the max, buying a house may not be a good idea. While your mortgage payment may be lower than what you pay in rent, you also have to worry about added costs like maintenance, PMI if you make a down payment of less than 20% and homeowners insurance.
You don’t know if you’ll stay in one location for long. If you aren’t sure you’ll stay with your current employer or in your current city, it may not be a financially sound idea to buy a home. Renting would give you more flexibility if you decide to relocate to another area.
You don’t have an emergency fund. If you don’t have money tucked away into an emergency fund, it’s usually wise to put off buying a home until you’ve saved some cash. Otherwise, a single emergency—like a car repair or a broken hot water heater—could lead you into debt.
You’re not prepared for maintenance costs. Saving money for the down payment and closing costs is just part of the expense of becoming a homeowner. Experts generally recommend that you save 1% to 3% of the home’s price each year to cover maintenance costs, such as repairs to the roof.
If you don’t feel ready to become a homeowner, it’s OK to wait until the time is right. Carefully consider your finances, career plans and other long-term goals to decide if buying a home makes sense for you.
Student loans are a huge part of our lives, and it’s important to understand how they can impact your future life.
It’s true that student loans have an effect on home loans. When you take out a loan for your education, you’re making a commitment to pay back the money you borrowed—and that means paying higher interest rates than those who don’t have debt. This can make it harder to get approved for a home loan because lenders will be more wary of lending you money if they know you have other debts.
However, there are ways around this! You can apply for an income-based repayment program (IBR) or income-driven repayment plans (IDR). These allow you to pay off your student loans over time based on how much money you make each month, which can help get rid of those extra costs and make it easier for you to qualify for mortgages in the future.
In conclusion, student loans do affect home loans—but there are ways around them!