Student loans are fairly common, but does having student loan debt mean that you can’t purchase a home? Today, more than one-third of all American students have to go in debt to attend college. Their average monthly payment for that debt is almost $400 with an average balance of about $30,000. Many people who have student debt want to wait until their loans are paid before getting a mortgage but this isn’t necessary. It is possible and potentially even beneficial to invest in a home. There are a few considerations to take before making this decision.
Review Debt to Income Ratio
Anyone interested in buying a home should consider how their student loan payments and hypothetic mortgage payments will affect their debt-to-income ratio. If you have a lender in mind, consider meeting with them to review your options. All mortgage lenders are going to use your debt-to-income ratio to asses whether you qualify for a mortgage.
The lender will add all existing monthly debt payments and your expected mortgage amount. This number is then divided by your monthly income to determine what your ratio will be. You can even do this on your own. For example, if you pay $200 a month for your student loans and you’re looking at a home that would come with a monthly mortgage payment of $1300, then your total monthly debt would end up being $1500. If your monthly income is $6,000, then your debt-to-income ratio is going to be 25%.
This is a handy calculation that can let you decide on if you can currently afford to buy a home and, if so, the cost of the home. A lender typically wants a debt-to-income ratio of less than 43% but ideally less than 36%. The key in this calculation is the amount that you pay every month, not the overall amount of debt that you have.
Review Mortgage Options
The type of mortgage that you choose may also give you a higher chance of getting a home. A private lender such as a bank or other financial institution is the most common option, but you may want to consider an FHA loan. This is a mortgage that is backed and insured by the Federal Housing Administration. It’s designed for people who have limited savings or lower credit scores. This may help you qualify for a lower interest rate and a lower down payment. This is often a good option for first-time homebuyers, especially those who have student loan debt. To make your loan easier to pay, you may want to consider a debt consolidation mortgage. This works to give you only one monthly payment to make and is often easier to manage.
Improving Credit Scores
If you’ve had difficulty paying loans in the past, then your credit score may have been negatively affected by it. Student loans affect your ability to qualify for a mortgage since lenders consider credit scores as well. You build credit and improve your score by making monthly loan payments on time. If you’ve missed payments in the past, you’re going to be considered riskier to provide a loan. Additionally, by having a higher rate, you may also qualify for a lower interest rate.
Having a low credit score doesn’t mean that you won’t be able to qualify for a mortgage or buy a home. However, it may mean that you’ll have to wait longer to qualify for a mortgage. With an FHA loan, you typically can qualify with a credit score of 500 or above. However, with a conventional loan, you’ll typically need a score of 620 or higher. If your score is low, consider working on improving it over a few months and then apply for a mortgage. You may find that you end up saving money in the long run by qualifying for a lower rate.
Having student debt may seem like a burden but it doesn’t have to keep you from building your financial future. You can still purchase a home and qualify for a mortgage without taking on too much debt at one time. Use this guide to determine your total monthly debt payments and guide you towards the optimal type of home to purchase.