Buying a House With Student Loans: Truth be told: having a student loan debt poses issues when you want to get a house mortgage. Student loan debt can affect your ability to get a mortgage and buy a house; this is done by increasing your debt-to-income ratio and reducing the amount you save for a down payment.
One study indicated that 75% of college graduates with student loans said that their loan payments prevented them from buying a house or a car. Millions of college graduates are struggling under such a burden of student loans and credit card debt. This guide will help you avoid these issues.
Factors Affecting You from Getting a House Mortgage with Student Loans
Qualifying for a mortgage with student loans can sometimes be more difficult, but it is definitely possible. In fact, student loans aren’t a particular cause of concern for most lenders and won’t, by themselves, disqualify you from getting approved for a mortgage.
However, student loans can pose problems when they cause you to have a high debt-to-income ratio (DTI). This ratio represents your debt relative to your income, and there are two types of DTI ratios that must be below lender qualifying limits in order for you to get approved for a mortgage loan.
The front-end ratio compares your housing costs to your income. This includes your principal and interest payments on your mortgage, as well as property taxes and insurance. The total aggregate cost of housing is abbreviated as PITI, and lenders usually want it to be below 28% of your income.
- If your mortgage payment, including principal and interest, is $1,500 per month; your taxes are $300 per month; and your insurance is $125 per month, your PITI would be $1,925.
- If you earn $5,000 per month, divide $1,925/$5,000 to get a front-end ratio of 38.5%. This is too high and your loan wouldn’t be considered affordable.
Your back-end ratio could be affected by your student loans. This ratio compares your income with your total obligations, including PITI plus other monthly debt payments.
Most lenders want your back-end ratio to be below 36%. Even for FHA loans, which are guaranteed by the Federal Housing Administration, the maximum ratio is 43%.
- Say your total housing costs are $1,000 per month, your student debt payment is $400 per month, your car payment is $200 per month, and you have no other debt. Add those up to get $1,600.
- If your income is $5,000 monthly, your back-end ratio would be $1,600/$5,000 or 32%, so you would qualify.
- If you owe a lot on your student loans and your monthly payment is very high, this could affect your back-end ratio and you might not be able to get a mortgage loan thanks to your student debt.
Other Factors That Affect Your Ability to Buy a House
There are also some other factors that can affect whether you are able to buy a house. Some relate directly to your student loans or debt-to-income ratio but others are independent.
Your credit score is a key factor in whether you can get a loan. Most mortgage lenders want a score of at least 620 for a conventional loan, although you can get a home with a score as low as low as 500 if you obtain an FHA loan. However, the better your score, the better your interest rates.
Your credit score is determined by five key factors:
- Payment history: This factor is most important and looks at whether you’ve ever been late with payments, had any debts charged off, been evicted or sued, been foreclosed on, or had a car repossessed.
- Your credit utilization ratio: This second-most important factor considers the credit available to you divided by credit you’ve used.
- Credit mix: It’s helpful to have a variety of different kinds of debt to get the highest credit score. This includes revolving debt (such as credit cards) and installment loans (such as personal or car loans).
- The length of your credit history: This is determined by the average age of your accounts, and a longer history will result in a better score than a shorter history.
- Inquiries: This looks at new credit. Each time you apply for new credit, an inquiry goes on your report and stays on your report for two years. Your score is lowered by too many inquiries.
Income and Employment History
This is related closely to your debt-to-income ratio. The higher your income, the more confident lenders are that you’ll be able to pay off your mortgage. Even if you have other debts, such as student loans.
College grads tend to earn more than those without a degree, so the impact of your college diploma on your salary could help to offset any damage your student loans do to your ability to get a mortgage.
Lenders also want to see a stable employment history, which means being employed by the same employer for at least 12 months or having at least two years of proof of income if you’re self-employed.
The more money you are willing to put down on your home, the easier it should be to qualify for a mortgage and the better the mortgage rates you’ll receive.
Most lenders require at least 10% down on a conventional mortgage, but it is possible to get an FHA loan with as little as 3.5% down. But be advised: putting down less than 20% on your home results in additional costs.
First, you’ll have to pay for private mortgage insurance (unless you get a loan guaranteed by the VA). And second, your greater debt balance will accrue even more interest every month—and at a higher rate.
Putting down more money will not only help you to get a mortgage, but it will also reduce the chances you’ll end up underwater or owing more than your home is worth if real estate values decline.
How to Get a House Mortgage When You Have Student Loans
- Consolidate at a lower rate to lower your payments. Then use the savings to put away for a down payment on a house.
- Set financial goals for yourself, which will help you focus on the big picture and skip unnecessary spending.
- Avoid credit card debt. Have one or two major credit cards and pay the balances off every month. If you must carry credit card balances, transfer them to cards with lower rates whenever possible.
- Establish a record of paying your bills on time, so you don’t damage your credit score, which is key in getting the best interest rates on mortgages, car loans, and other loans.
- Check your credit report annually for any inaccuracies and resolve them if there are any.
- Avoid taking out any new loans or applying for any new credit cards, that is in the months before you start looking for a house.
- Pay off as much debt as you can before starting to house hunt, it helps you qualify for the mortgage.
- Prepare a realistic budget, make sure you can really handle the mortgage payments on top of your other debt.
- Save all “found” money: income tax refunds, bonuses, overtime pay, and cash gifts, to go towards your down payment or closing costs.
Thereby increasing your chances of getting that house mortgage you have always wanted. You can also go for the option of getting a house that you can afford. Rather than overextending yourself to purchase an expensive home