For many consumers, buying a house is a major financial and life milestone. However, student loan debt is preventing some millennials from making home purchases. According to a Student Loan Hero survey, 41% of college-educated Americans with student loans have postponed buying a home because of their debt.
Having student loans won’t keep you from buying a house, although you should be comfortable with the idea of taking on a large amount of debt while still dealing with your student loans. Carefully consider your options, and decide what makes sense for your own financial situation. Here is what you need to do when buying a house with student loan debt.
Improve Your Credit Score
The most important factor lenders consider when deciding whether or not to lend you money is your credit score. You can maintain a good credit score even if you have student loan debt. In fact, your student loan debt probably won’t drag your credit score unless you’ve been missing payments.
Decrease Your DTI Ratio
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.
When buying a house with student loan debt, you need to be aware of the impact your loans have. Many lenders follow what is called the 28/36 qualifying ratio to determine if you’re eligible for the best rates.
This means that you should spend no more than 28% of your gross monthly income on total housing expenses, and no more than 36% of total debt service including the new mortgage payment.
Pre-Approval & Homebuying Power
A pre-approval from a lender can help you see what the costs and down payment requirements are. To determine what you qualify for, a lender considers your two-year employment history, credit history, income, and assets.
Once you have your pre-approval, you can use it to help gauge which homes you can afford. Additionally, sellers are likely to take you more seriously once you have a pre-approval in place because they know the bank has already committed to providing you with financing.
Down Payment Assistance Programs
There are a number of down payment assistance programs that are acceptable to lenders. Many states and cities offer down payment assistance programs, and there are local programs that allow you to use sweat equity if you want to build a new home.
It’s also possible to take advantage of federal loan programs, even if you have student loans. You may qualify for an FHA loan, which would mean a down payment as little as 3.5%.
Research your options and speak with a knowledgeable mortgage broker to find out what programs you qualify for a federal, state, and local level.
