A 2018 study revealed that 43% of college-educated Americans with student loan debt postpone buying a home because of this debt. Student loan debt doesn't always have to keep you from purchasing a home. It all comes down to correctly understanding and structuring your finances. If you have student loan debt and would like to purchase a home, here are some things you can start doing now to help accomplish that:
Decrease your debt-to-income ratio (DTI)
DTI is the percentage of your gross monthly income that goes towards payment of your debt. Lenders use this to measure your ability to manage monthly payments and repay debts. Typically, lenders follow a “28/36 qualifying ratio” in deciding if you qualify for a loan. What that means is no more than 28% of your gross monthly income should go towards housing expenses, and no more than 36% of your gross monthly income should go towards your total debt (this includes your new mortgage payment). Keep in mind that this is not always the case, many lenders will still loan you money if your DTI is higher but at that point, you have to decide if that makes financial sense for you.
Manage and Improve your Credit Score
FICO credit scores are the most commonly used credit scores. FICO scores range from 350-800, the higher the score, the better your credit. If you have a credit score of 750 or higher you are considered to have excellent credit. If you have a credit score of 600 or below, you are considered to have poor credit. You can obtain a free credit report once a year from www.annualcreditreport.com. It's a good idea to get a copy of your credit report to verify your credit history is correct. If you find any errors, report them to the credit bureau ASAP so corrections can be made (especially if they are negatively affecting your credit score). With all that being said, in order to qualify for a mortgage and get a low rate, your credit score needs to be good.
Ways to Manage & Improve your credit:
- Don’t close old accounts
A lot of people think that closing old accounts will increase and help their credit score but this is not always true. An old account, especially in good standing, can actually increase and help your credit.
- Keep credit utilization low
Credit utilization is the ratio of your credit balances to your total available credit lines. In other words, how much credit do you have available vs how much you owe. For example, if you have credit lines of $15,000 and you have balances owed of $4,500, your credit utilization is 30%. Ideally, you want your credit utilization to be below 30%. If you can get it under 10%, then you're doing really well!
- Make your payments on time
Payment history is one of the largest components that affect your credit score. Not only that, lenders want to lend money to financially responsible borrowers and payments made on time show you have been financially responsible. A good way to ensure payments are made and made on time is to set up autopay for accounts. This leaves no room for error and/or forgetting to pay an account.
Get Pre-Approved for a Loan
Get pre-approved with a lender BEFORE you start looking for homes. This way you know exactly how much you can afford. Too many people start searching for a home, or find a home and then try to get pre-approved (which is backward). Lenders will look at your income, employment, assets, credit profile, and additional information to determine eligibility. A lender will also request documentation to support the provided information. Once you have your pre-approval, you will know exactly how much you can afford when purchasing a home.
Look into down-payment assistance programs
There are several down-payment assistance programs available. Down-payment assistance is usually provided by local, state, nonprofit, or directly through your lender. They provide a set amount of money to qualified homebuyers to cover their down payment and/or closing cost. There are FHA loans, USDA loans, VA loans, and many other options. Take the time to research your options and speak with a qualified lender that can help you decide what programs would be best for your situation.
You can purchase a home if you have student loan debt as long as it makes financial sense for you. Take the time to look over your finances, see where you can make improvements, and decide if you are financially ready and able to purchase a home.