Have you been thinking about taking the leap into homeownership? Like many first-time homebuyers, you might be asking yourself how student loan debt affects your chances of buying a house.
Getting approved for a mortgage is based on three main factors – your down payment, your credit score, and your household income relative to your household debt. There may be other factors depending on the type of loan you are applying for, but having a student loan doesn’t need to negatively impact your ability to buy a home if you focus on these three.
After graduating, being placed on a short-term deferment by your student loan company is a common next step; which gives you time to get a job before starting to pay back the debt. Since you are not actively paying off the debt, you may forget to include that future payment in your current budget and think you have more money to spend on a house. So don’t forget about this and start pre-planning your future expenses to give yourself a clearer picture of what you can afford when you’re ready to buy, even with student loan debt.
How Much Impact Does Your Student Debt Have On Buying a Home?
When you apply for a mortgage, your lender hones in on something called debt-to0income; this is done by dividing all of your debts by your gross income. The Federal Housing Administration required that the anticipated monthly student loan payment, or 1% of your outstanding student debt balance, is included as a part of the DTI ratio.
In general, your debt-to-income ratio should be 43% or less in order to get a mortgage approved, but can differ lender to lender and loan to loan. So if you are currently paying off school loans or will have to pay off school loans in the future, it’s still possible to get a mortgage as long as your debts don’t exceed 43% of your income. It is also important to factor in other expenses, like food or utility bills, to get a clearer picture of how frugal you will have to be while owning a home. If you can afford to have the debt and all your other expenses while paying a mortgage comfortably, then you are in a much better position than you may have initially thought.
