After graduation, many college students are looking to start their life. Get their dream job, get married, have kids, and become a homeowner. However, buying a home can seem impossible when you have stacks of student loan debt weighing you down. We know it seems difficult, but we are here to tell you that it is possible. In fact, 41% of college-educated Americans with student loans have postponed becoming a homeowner due to their student loan debt, according to Student Loan Hero. On top of that, student debt has surged 56% from 2004- 2014. The national average student loan debt is now at $28, 950. However, owning a home is still within reach.
Understand Debt-To-Income Ratio
Your debt-to-income ratio (DTI) compares how much money you owe versus your income. Most mortgage lenders require a borrower’s DTI to be no more than 36%. The best way to think about this is in terms of your monthly expenses. For example, if you make $6,000 a month but spend $500 a month paying off student loans and credit cards, you divide $500 by $6,000 to get a DTI of 8.3%. This is well below 36%, it will rise significantly if you add a mortgage to your monthly dues. To figure out your DTI just enter your income and debts into a home affordability calculator.
Refinance Your Student Loans
While most college tuition borrowers get their original loan from the federal government, it is also possible to refinance with a private lender. According to a recent survey by college lender marketplace, one-third of these borrowers can snag lower interest rates with a private refi, which could free up cash for a home loan.
Another option is to make room for a mortgage is to refinance and extend the life of your college loan. This results in smaller payments over a longer period of time and more money you can put toward a mortgage. Of course, one downside is you’ll end up paying more in interest over the life of your college loan. However, it means you can buy a home now, which may well be worth it.
Take Advantage of Fannie Mae’s New Polices
Fannie Mae, the government-sponsored enterprise that buys and securitizes home loans, recently rolled out two new policies designed to make it easier for college grads with student loan debt to get a mortgage. Here is what has changed in your favor:
- Debts Paid by Other Parties: One policy gives mortgage applicants the ability to exclude non-mortgage debt (like credit cards or student loans) paid by someone else (such as a parent or employer) from their DTI. As such, this option might enable you to stay below the 36% DTI threshold that most lenders set.
- Income- Based Repayments: In the past, lender assessing your worthiness for a home loan were required to factor in 1% of your entire college loan balance as your monthly payment. Which could be sizable and push you over that 36% DTI threshold. But now, Fannie Mae allows lenders to acknowledge that you could be paying much less than 1% if you participate in federal reduced-payment income-based programs.
Clean Up Other Aspects of Your Financial Profile
Even if you are chipping away at a mountain of student loan debt, it does not need to sink your home-buying prospects because it’s just one facet of what lenders look at to judge your eligibility for a home loan. Student loan debt is jus tone factor that affects your mortgage application. Your income and a good credit score all play a role.
Beef Up Your Down Payment
Even if you are trapped in a low-income job and high student loans. Another way to pass muster is having enough cash to make a 20% down payment on your house. Lenders are much less likely to disqualify an application with 20% down.
Sadly, many young homeowners can’t afford a 20% down payment, especially considering that 37% of millennial renters have not saved a cent for a down payment, according to a recent survey by Apartment List.
