A college education is an important, and often costly, endeavor. Seventy percent of students leave college with significant student loan debt and the average amount of debt owed is $37,172. When you add debt from an auto loan or credit card on top of that, it’s easy to see why, in recent years, the idea of owning a home has been put on the back burner for many individuals.
Can You Get a Mortgage When You Have Student Loans?
Buying a house with student loan debt doesn’t have to be an unrealistic dream. Getting a home loan when you’re also carrying student debt is possible – you just need to approach the process with caution, so you can enjoy a bright financial future.
Know Your Numbers
There are a few numbers you should know when want to buy a house, including your credit score and your debt-to-income ratio (DTI). These are both factors that lenders consider when you apply for a mortgage. They also determine which mortgage options are available to you.
A low credit score can become a barrier when buying a home. Thirty percent of your credit score is based on how much debt you owe, which includes student loan debt. However, thirty-five percent of your credit score is based on your payment history. Even if you do carry a significant amount of student loan debt, a track record of making your student loan payments on time and in-full helps to improve your credit.
Student loans can also affect your DTI ratio. This ratio is determined by dividing your monthly expenses by your pre-tax income. A 45% DTI is recognized as the highest percentage that lenders will allow when you apply for a mortgage. Even with student loan debt, you can maintain an acceptable DTI by limiting your other monthly expenses, especially credit card debt!
Explore Buyer Assistance Programs
For many first-time buyers, saving for a down payment on a new home can be difficult. As stated above, the average amount of student loan debt owed is $37,172. This amount is equal a 20% down payment on a $180,000 house. Obviously, without student loan repayments, many individuals would already have enough funds to afford this level of down payment.
As a first-time homebuyer, there are many assistance programs available to you, which allow you to buy a home with a small down payment or no down payment at all.
FHA Loans — These loans are insured by the U.S Federal Housing Administration and minimize the risk to the lenders who provide them. With an FHA loan, you’re only required to provide as little as 3.5% for your down payment.
USDA Loans— The USDA Rural Development Guaranteed Housing Loan Program provides 100% financing mortgages to moderate- and low-income homebuyers in eligible rural and suburban areas. These loans require no down payment.
VA Loans — These loans are available to individuals who meet the guidelines for military service. They are guaranteed by the Department of Veteran Affairs and provided by private lenders. A down payment is not required for these loans.
First-Time Homebuyer Programs — Many financial institutions such as Diamond Credit Union, offer first-time homebuyer programs that help with saving for down payment costs. Additionally, Freddie Mac programs like the HomeOne Mortgage Program, which lets you apply for a mortgage with a little as 3% down, and the Home Possible Mortgage program which also requires a 3-5% down payment but with the added feature of reduced private mortgage insurance, may work for your personal situation. The First Front Door Program is a grant program that will match down payments for qualified applicants at participating credit unions in Pennsylvania, Delaware, and West Virginia.
Your first home doesn’t need to be your forever home. By making a few compromises on your “wish list,” you may be able to get into a new home faster. A survey from the National Association of Realtors showed that homebuyers made the following compromises when buying a house with student loan debt:
- Size of the home (two bedrooms vs. three bedrooms)
- Style of the home (condo vs. single-family home)
- Condition of the home (fixer upper vs. turn-key)
- Location of the home (further from work, an area with lower cost of living, etc.)
Strategies for Paying Off Student Loan Debt
Although it’s possible to carry both a mortgage and student loans, it doesn’t mean you have to. Many college graduates have followed these strategies to successfully pay off their student loan debt.
• Pay More than the Minimum — If you have extra money remaining at the end of each month, consider paying more than the minimum amount on your loan repayment. Paying an extra $100 per month could help you repay your loan a year sooner than expected. An extra $500 per month and you could be debt-free of your student loans almost four years earlier.
• Make Lump Sum Payments — Use monetary gifts, work bonuses, and tax returns to make additional lump sum payments towards your student loan debt, whenever these opportunities present themselves. “Leveraging the best use for excess money can be challenging. This may be a good discussion to have with a financial representative prior to making that decision,” added Paul Yacobowsky, Director of Sales at Diamond Credit Union.
• Refinance Your Loans — If you are holding several federal or private student loans, you may be able to consolidate and refinance them all into a single loan, with better terms and a lower interest rate.