Buying a House When You Have Student Debt

Buying a House When You Have Student Debt

If you are a part of the 46 million Americans with student debt, you may be wondering if you will be able to buy a home before paying off those college loans. Though taking on a mortgage while having existing debt may not be the right choice for everyone, there are some cases in which it is totally possible and manageable.

To qualify for a mortgage before you have paid off your student loans, there are a few things you will need to focus on to show your lender that you are able to manage it all.

Credit Score

While your student debt will factor into your mortgage approval, your lender will look at much more than just how much debt you are in. They want to see how well you manage that debt and if you have a reputation for responsibly handling debt payments. One of the simplest criteria to reflect this is your credit score.

First things first: if you don't know what your credit score is, find out with any of the free credit checks online.

Once you know what your credit score is, you can determine whether you need to raise it before applying for a mortgage. Ideally, your credit score will be in the 700s or higher, but scores in the 600s will still qualify for some mortgage types with the right employment history, income, and other qualifying factors.

Debt to Income Ratio

Your Debt-to-Income Ratio (DTI) is the ratio of your monthly minimum debt payments to your monthly income. Mortgage lenders look at your DTI to see how much of your income is going out to cover debt payments. Most lenders have a target DTI that they will not go beyond, which means whatever your monthly mortgage payment would be plus your current debt payments need to stay below that number.

If you realize that your DTI needs to be lowered before buying a home, there are a few ways to work toward that goal, including:

  • Raising your income
  • Paying down existing debts

If you plan to lower your debts, do so strategically by thinking about what will lower your monthly payments, not just your overall debt.

Credit Utilization

One of the best ways to raise your credit score is to lower your credit utilization. This is the percentage of your credit that you are using. In other words, if you have a credit card with a $10,000 limit and you carry a $5,000 balance, you have a utilization rate of 50% on that credit card.

If any of your credit cards or lines of credit have a utilization rate of over 30%, work toward lowering those first. Ideally, all of your credit accounts will be as close to a 0% utilization rate as possible.

Down Payment Assistance

If paying your student loans is leaving little room to save for your down payment quickly, make sure to educate yourself about down payment assistance options that might be the right fit for you. In most cases, you do not need to save a 20% down payment anymore.

Some of these options include:

  • FHA loans, insured by the Federal Housing Administration and requiring 3.5% down, or sometimes even less
  • Conventional loans, which only require 3% down
  • USDA loans, for as little as 0% down on qualifying homes in rural areas
  • VA loan, available to veterans and active-duty military with a 0% down payment
  • State-specific down payment programs, such as grants for certain career fields, single parents, or specific income levels

Refinancing Student Loans

Many people are not aware that refinancing is available for student loans. Find out if you might qualify for student loan refinancing, which may lower your interest rate and ultimately lower the amount you will pay both monthly and over the life of the loans.

For more information on Nebraska real estate purchases, Omaha properties or any real estate around Papillion and Omaha, please contact Flatwater Realty anytime.

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