If you attended college in the United States, you may have significant student loan debt one in every five American adults, or 44.7 million Americans, owe money on student loans. A recent Credible study found that the average student loan debt in the United States is $33,654, with over 2.8 million borrowers owing $100,000 or more.
While most Americans with student loan debt are young, many are older—the number of persons over the age of 60 holding student loan debt has more than doubled in the last decade. As a result, some will spend their lives repaying student loan debt.
So, what does this mean for the average home buyer with $100k+ in student loan debt? Buying a home with student loan debt is still possible. Even significant student loan debts do not have to prevent you from becoming a homeowner if you are okay bearing two long-term loans at the same time.
This article will help you identify ways you can buy a home with student debt— even more than $100k.
Can You Buy a House With Student Loan Debt?
Student loans are the most common type of debt carried by first-time house buyers. However, compared to other forms of borrowing, such as credit cards, they might disproportionately influence your mortgage budget.
But how do you truly crunch the numbers to see if you can afford to buy a house?
The first step is to calculate your debt-to-income ratio, taking into account student loans and any other debts you pay monthly.
The basic DTI calculation is straightforward:
DTI = (Total Monthly Debt Payments) / Monthly Pre-Tax Income
Assume your gross monthly income is $5,000. You pay $300 every month toward student loans, $250 toward a car loan, and $200 toward credit card minimum payments.
That implies you're spending $750 a month on debts, or 15% of your salary.
When your home bills are added to your previous loans, lenders normally prefer a DTI of 43 percent or lower.
Here's how a 43 percent DTI works out with a monthly salary of $5,000.
DTI at its highest: 43% (0.43)
0.43 x $5,000 = $2,150
So the most you can spend on monthly debts, including housing, is $2,150. You can calculate your maximum mortgage payment by working backward from this figure.
The maximum debt payment is $2,150.
Debts already owed: $750
$2,150 minus $750 is $1,400.
Mortgage payment maximum: $1,400
You now know that you may expect to pay up to $1,400 per month on your mortgage. Then, using a home affordability calculator, you may determine how much house you could be able to afford.
Remember that mortgage payments include property taxes and homeowners insurance, so you must account for them when estimating your budget. A decent mortgage calculator (such as the one provided above) will incorporate taxes and insurance to provide a more accurate estimate.
Should You Buy a House With Student Loan Debt?
First, examine your DTI ratio. Lenders are less concerned with the quantity of debt you have and more concerned with how that debt corresponds to your total income. You can still buy a home with student debt if you have a steady salary and keep track of your payments.
However, if inconsistent income or payments account for a significant portion of your entire monthly budget, you may have difficulty obtaining a loan. Therefore, prioritize loan repayment before purchasing a home if your DTI is greater than 50%.
Before you consider homeownership, consider other aspects of your finances. For example, if you have a reasonable DTI ratio but no emergency fund, you may want to wait until you accumulate some savings.
Similarly, if your student loan payment prevents you from making retirement contributions, you might consider putting off buying a home until you have paid off more of your debt. Remember that most mortgages need a down payment when purchasing a house. You should have this saved as well.
Finally, consider your current interest rate. If you have a high-interest rate on your student loans, they will cost you more money. Paying down more of your higher-interest loans before investing in a property allows you to minimize the amount of interest you pay.
Obstacles To Buying A House With Student Loan Debt
Your debt-to-income ratio, savings capacity, and credit score are all affected by student loans in different ways. All of these factors could influence your ability to purchase a home.
* Student loans increase your debt-to-income ratio. Lenders utilize the debt-to-income (DTI) ratio to establish your eligibility. DTI is the sum of your monthly debt payments divided by your monthly gross income.
Most mortgage lenders require your overall DTI ratio, including your anticipated mortgage payment, to be 43 percent or less. At the same time, it is possible to locate lenders who would accept a higher DTI. However, having a high student loan payment and other monthly costs may drive your DTI above the maximum threshold and make it more challenging to qualify.
* Student loan payments reduce your ability to save. Usually, a down payment is required when purchasing a home, which is usually in the thousands of dollars. However, borrowers with student loan payments may find it challenging to save for a down payment in addition to their monthly student loan fees, delaying their ability to buy a property.
For example, having a $400 monthly student loan payment means you're missing out on $4,800 in potential savings for a home each year.
* Your credit score is affected by your student loan payment history. Payment history is an essential aspect of your credit score, accounting for 35% of the total score. Yet, according to Federal Reserve research, 17% of adults in 2019 were behind on their student loan payments.
While a regular issue, missing loan payments might make it more challenging to qualify for a mortgage. Even missing one payment will significantly impact your credit score, making lenders consider you a riskier candidate.
Mortgage lenders consider your credit score substantially when calculating your approval prospects and interest rate. If you've had difficulties making timely payments on your student loans, your chances of qualifying for a mortgage may suffer.
How to Buy a House With Student Loan Debt
While buying a home with student loans may be more complex, it is not impossible. If you're wondering how to secure a mortgage with student loan debt, follow these five suggestions to increase your chances of approval.
1. Examine Your Credit
Examine your credit report for inaccuracies, fake accounts, and past-due items before applying for a loan or looking for a property. CreditKarma.com allows you to view your credit reports from the three main credit agencies.
Typically, you can only read reports from each bureau for free once per year.. If you discover errors on your credit reports, you can dispute them with each credit bureau, depending on which one indicates the issue.
Focus on paying all of your obligations on time to preserve or increase your credit score. It's usually good to keep older credit accounts open, such as credit cards. Your credit score is also affected by the duration of your credit history.
2. Reduce Your DTI Ratio
If your DTI ratio is too high, you may have difficulty obtaining a home loan. However, you can solve that problem by paying down existing debt and increasing your income.
If you have numerous types of debt, such as credit card balances, vehicle loans, and student loans, strive to pay off the account with the lowest balance first. Paying down an account reduces your monthly payment obligations and improves your DTI ratio.
You can also lower your DTI ratio by increasing your income. Consider asking for a raise at work or starting a side job to supplement your monthly gross income.
3. Reduce Your Student Loan Payments
Lowering your student loan payments will allow you to save more money each month and reduce your DTI ratio. Consider applying for an income-driven repayment (IDR) plan if you have federal student loans. IDR plans base your payments on your discretionary income and family size, and you could qualify for a substantially lower premium than you currently have.
However, when using an IDR plan, keep in mind that mortgage lenders utilize unique algorithms to calculate how your student loan payment fits into your DTI ratio. Therefore, your IDR monthly payment amount can vary from year to year according to your circumstances. In addition, these formulas can differ depending on the lender.
If you have private student loans, you can minimize your payments by refinancing them. When you refinance your debt, you may get a lower interest rate, a longer payback term, and a lower monthly payment.
4. Explore Your Mortgage Options
Financial experts generally advocate at least a 20% down payment because it allows you to avoid paying private mortgage insurance (PMI). However, 20% is not a hard and fast rule, and most purchasers find it impossible to have that much cash on hand. Depending on your circumstances, you may be able to purchase a home with as little as 3% down.
There are several types of mortgages with low down payment requirements:
* VA loans. If you are a military veteran, you may be eligible for a home loan offered by and partially insured by the United States Department of Veterans Affairs. Qualified applicants can be authorized with no money down.
* FHA loans. Qualifying homebuyers can acquire Federal Housing Administration (FHA) loans with as little as 3.5 percent down.
* Conventional loans. Some lenders are offering conventional mortgages with as little as 3% down.
* Fannie Mae HomeReady mortgages. This program is for first-time homebuyers with low incomes. If you qualify, the needed minimum down payment is 3%.
5. Look Into First-Time Homebuyer Programs
Don't forget to check into programs for first-time homeowners, which can make the process easier and cheaper. Depending on the program, assistance may take the form of:
* Grants, forgivable loans, and payment-deferred loans are all options for down payment assistance.
* Closing cost assistance offsets the amount of money required at the closing table.
* Tax breaks are available through various state and local governments.
* Homebuyer education classes can help you understand your loan alternatives, the purchase process, and how to apply for a mortgage.
Some states even have homeownership programs designed exclusively for people with school loans. Before applying to any program, make sure you meet the eligibility conditions. For example, you may be required to fulfill income requirements, be a first-time purchaser, or dwell in the property for several years.
Signs You're Ready to Buy a House, Even With Student Loans
Buying a house with unpaid student loans is a big commitment, so before you start house hunting and comparing mortgage rates, take the time to examine your current situation and how it could change in the future.
Sign 1: You've Considered ALL of the Costs of Home Ownership
Owning a home has far more duties than simply making monthly mortgage payments. Utilities (such as gas, electric, and water), cable, internet, and waste are some of the additional costs to consider.
Purchasing a home also entails transaction fees, repairs, and property insurance. Therefore, you must understand how much it costs to buy a property before paying off student loans and buying a home!
Sign 2: You're Not Going Anywhere Anytime Soon
Buying a home is worthwhile if you have a solid career in a city you enjoy. However, if you are unsure where your work will take you in the following five years, you should reconsider purchasing. Use five years as a starting guideline.
According to experts, most homes require at least five years to break even. So for the first few years of homeownership, you will pay primarily the mortgage interest rather than principal.
Sign 3: You keep a good credit score.
Excellent credit is required for the best mortgage rates. However, if your credit score is less than 740, it doesn't mean you should postpone your home purchase. On the other hand, if your credit score will suffer due to neglecting your student loan debt in favor of your mortgage, you should consider deferring your house purchase for the time being.
Sign 4: You have a steady source of income.
Individuals will have unpredictable sources of income in some industries. Salaries in commission-based sectors are frequently variable. You must have a consistent income stream before paying off student loans to acquire a home. Many mortgage loans and lenders will also need this as a condition for approval.
Sign 5: Your income-to-debt ratio is high.
When you apply for a mortgage, mortgage lenders will look at your credit history and your current debt levels from student loans, credit card debt, vehicle loans, and other types of debt.
Before taking on the responsibility of homeownership, you should also analyze your debt levels. As a general guideline, 43% is the highest DTI ratio a borrower can have and still qualify for a mortgage. Ideally, lenders prefer a debt-to-income ratio lower than 36%, with no more than 28% of that debt servicing a mortgage or rent payment.
Here's Where to Start
It's usually a good idea to gather as much information as possible, regardless of how much student loan debt you have or what type of home you're searching for:
* Conduct your research.
* Examine your debt and your income.
* Determine how much you can afford to spend on a house in addition to your student loan debt.
You don't have to be debt-free to buy a house, but you can have difficulties securing a loan if you have too much debt. So first, calculate your DTI ratio and compare it to your total monthly income. If your DTI ratio is greater than 50%, you should pay down more debt before purchasing a property.
Additionally, before investing in a home, ensure that your financial status is steady. Before you shop for a loan, be sure you're on a stable repayment plan, have funds for a down payment (plus an emergency fund), and contribute to your retirement.
Are you ready to begin your home-buying experience in Texas even with a significant student loan debt? BHGRE HomeCity can help you find your new home.