Colorado Real Estate News

5 Tips for Buying A House With Student Loan Debt

Buying A House With Student Loan Debt

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.

Lower Your Student Loan Payments

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.

Improve Your Credit Score

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:

Pay Your Bills on Time

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.

Don’t Close Old Accounts

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.

Use Different Types of Credit

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.

Manage Your Credit Utilization

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.

Save for Closing Costs and a Down Payment

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.

Consider Down Payment Assistance Programs

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.

Take Your Time and Choose a Home You Can Afford

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.

Colorado Real Estate News

Can You Still Buy a House When Burdened with Student Debt?

Student Loans | Piggy Bank If you’re trying to pay off student loans and want to buy a house, follow these first-time home-buyer tips before you start the home buying process.

Fix or improve your credit score

One way to do this, on top of paying your bills on time, is to keep your credit card balances at or below the 30 percent threshold of the maximum available credit.  This can potentially save a buyer thousands of dollars over the life of the loan.  Higher credit scores would typically give you better interest rates.

Avoid quick fixes

Do not disclose existing credit accounts if you do not use them.  Also, do not pay all of your card balances to zero at once, unless you can do this every month; any change can be viewed as a quick fix.  Quick fixes can negatively impair your credit.

Maintain healthy debt

If you don’t have a substantial credit history, lenders might not have enough data to approve you for a loan.  Maintaining healthy debt and being a responsible borrower can help you avoid being labeled as a “thin file.”

Decrease your debt-to-income ratio (DTI)

As with student loan refinancing, a mortgage lender will calculate your debt-to-income ratio to determine your ability to make monthly payments on the new mortgage.  Typically, the maximum threshold for acceptable DTI is roughly 43 percent.  Special government programs and lenders might approve borrowers with higher DTI ratios, depending on a variety of underwriting criteria.

The easiest way to improve your DTI ratio, although not that easy for most borrowers, is by increasing your income.  Are you due a raise at work?  Can you take on additional freelance work?  If so, try to increase your monthly income several months before obtaining your pre-approval letter.

Your down payment

This may be the trickiest part about a student loan debt.  If you can save the money for a down payment, should you just use it to pay off your student loans first?  The first thing to think about is the interest rate on your student loans.  If you have high interest private student loans, then it probably makes sense to pay those down first and then start to save for your down payment afterward.  However, if you have federal loans, or can consolidate your loans into a low-interest payment, then you might get more benefit out of putting your money toward a down payment.

Get pre-approved

By getting pre-approved by a lender, you’ll learn what the costs and down payment requirements are.  To determine what you can qualify for, a lender would look at your two-year employment history, credit score, income, and assets.  Also, get a list of documents from your lender that will be required.  In addition, there are many federal and private programs geared towards first-time buyers with minimal down payment requirements.