By now, you have probably heard of the student loan crisis. Millions of Americans emerge from higher education weighed down by thousands (sometimes hundreds of thousands) of dollars of debt. Perhaps you are one of these people.
Being in debt can change the way you look at finances. American Student Assistance found that 55 percent of respondents cited student loan debt as a primary reason to delay homeownership. The National Association of Realtors’ Chief Economist Lawrence Yun agreed that the combination of student loan debt and rising home and rent prices has left many young Americans feeling incapable of entering the housing market.
Despite this, there are plenty of first-time home buyers who have managed to balance mortgage payments with their student-loan payment plans. Two-fifths of first-time home buyers reported carrying student loan debt, usually in the realm of $26,000. For comparison, this amount is slightly more than a seven percent down payment on the average home price in February 2017, as reported by the U.S. Census Bureau.
Before You Begin Your Home Search
There are three important figures every prospective homebuyer should calculate before beginning the homebuying process. This is especially true for people with student loan debt—or any debt, for that matter. These three figures are:
Your credit score
Your debt-to-income ratio (DTI)
The amount of cash you have in savings
Once you know these three numbers, you’ll be able to determine if now is the best time to buy a home. Here’s how to make that decision:
Your Credit Score
Every lender, mortgage or otherwise, will look at your credit score to get an idea of how well you manage your money. Creditors don’t want to supply a loan to someone who is notoriously bad at handling debt and payments. The higher your credit score, the more readily your mortgage lender will trust that you will make timely payments every month.
If your credit score is less than ideal—say, 620 or below—take some time to make improvements.
Check your credit report for errors, pay all your bills on time and in full and don’t close any old accounts. In time, you should see your score begin to inch upwards.
The amount of debt you have doesn’t matter so much as how that amount compares to your income. Lenders want to know that you have the means to pay off your debt under your present circumstances.
There are two figures your mortgage lender will look at: how a home loan will compare to your income, and how your total debt burden (credit cards, loans and all) will compare to your income.
For the former, lenders like to see no more than 28 percent of your income going toward housing expenses, according to Student Loan Hero. For the latter, it’s ideal if 36 percent or less of your income goes toward all debt payments.
The Amount You Have in Savings
Most homebuyers pay for a portion of the home upfront, otherwise known as the down payment. A 20 percent down payment is ideal, but not always practical. If this is not practical in your situation, but you have some savings accumulated, look into your options. There are programs available to first-time homebuyers that only require a three to five percent down payment. Or, if you’re a veteran, consider using your VA benefits for a VA home loan.
Working with a skilled mortgage banker can help you determine the best program for you. Always remember, before you embark on your house-hunting journey, take a good look at your savings and determine how much you’d be willing or able to put toward a home. This will help determine your price range and if you’re eligible for other mortgage program options.
To get a better idea of what buying a home with student loan debt would be like, talk to a mortgage expert at The Federal Savings Bank.
By Shaun Meller