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Buying a home is often a challenge, but especially in a highly competitive housing market. There were 2.1 million more homeowners in the fourth quarter of 2020 than a year ago, according to the Pew Research Center. Among other things, the record-low interest rates helped convince buyers to take the plunge into home ownership.
Getting a mortgage can be more difficult when you have student loans outstanding. But with a few extra steps you can increase your chances of getting a loan.
Read on to learn how to get approved for a home loan with student loan debt.
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How Student Loans Can Affect Your Ability To Buy A Home
If, like most college graduates, you left school with a student loan. Student loans can be a heavy burden, but you may not know how it can affect other areas of your life, including your goal of becoming a homeowner. Student loans can affect your ability to buy a home in the following ways.
1. Loans can increase your debt-to-income ratio
When you apply for a mortgage, lenders look at your debt to income ratio (DTI): the total amount of monthly debt payments divided by your gross monthly income. Lenders use your DTI ratio to determine if, after fulfilling your other obligations, you will have enough income to make the mortgage payments.
The maximum debt to income ratio to get a mortgage is 43% or less. If you have a significant amount of student loan debt, your minimum monthly payments can push your DTI rate above 43%, making it difficult to get approved for a loan.
2. You may not be able to save for a deposit
When you take out a mortgage, you usually have to pay a percentage of the home price as a down payment. According to a National Association of Realtors survey of down payment trends, the average down payment in 2019 was 12% for all home buyers but only 6% for first time home buyers.
If you were to buy a $ 250,000 home with a 6% down payment, you would have to save $ 15,000.
The Federal Reserve reported that in 2019 the typical monthly student loan payment was between $ 200 and $ 299, although some borrowers have much higher minimum payments.
Depending on your credit balance, staying on top of your credit could mean you run out of money in the month. Without a lot of headroom in your budget, meeting lenders’ down payment requirements can be difficult.
3. Late or missed payments can damage your balance
A common question asked by borrowers is, “Do student loans affect my creditworthiness?”
Student loans can have a significant impact on your score – positive if you pay on time every month, but negative if you miss payments.
According to the same Federal Reserve study, 17% of adults were behind on their student loan payments in 2019. While this is a common problem, missing loan payments can make it even more difficult to qualify for a mortgage. Missing even a single payment can dramatically lower your credit score, leading lenders to consider you a riskier candidate.
5 Tips for Buying a Home With Student Loan Debt
While buying a home can be more difficult when you have a student loan, it’s not impossible. If you are wondering how to get a mortgage on student loan, use these five tips to improve your chances of getting a loan.
1. Check your balance
Before applying for a loan or even buying a home, check your credit report and look for errors, fraudulent accounts, or items that are overdue. You can view your credit reports from any of the three major credit reporting agencies for free at AnnualCreditReport.com.
Typically, you can only view each office’s reports once a year for free. However, due to the Covid-19 pandemic, the credit bureaus are offering free weekly credit reports until April 2022.
If you find errors in your credit reports, you can appeal the errors to any of the credit reporting agencies, whichever is reporting the error.
To maintain or improve your credit score, focus on paying all of your bills on time. In general, if you have older credit accounts like credit cards, it is a good idea to keep them open. The length of your credit history also affects your credit score.
2. Reduce your DTI ratio
If your DTI ratio is too high, you may have trouble getting approved for a loan. However, you can fix this problem by reducing existing debt and increasing your income.
If you have multiple debts, e.g. B. Credit card balances, a car loan, and a student loan, try to pay off the account with the lowest balance first. By debiting an account, you reduce your monthly payment obligations and improve your DTI rate.
You can also reduce your DTI rate by increasing your income. Consider asking for a raise at work or taking on a sideline to increase your gross monthly income.
3. Lower your student loan payments
You can free up more money every month – and lower your DTI rate – by lowering your student loan payments.
If you have a government student loan, you should apply for an income-based repayment plan (IDR). With IDR plans, your payments are based on your disposable income and family size, and you may be eligible for a much lower payment than you are now.
However, if you are using an IDR plan, you should know that mortgage lenders have specific formulas to determine how your student loan payment fits into your DTI ratio. This is because your monthly payment amount for IDR can change from year to year depending on your circumstances. These formulas can vary depending on the lender. For example, lenders who make FHA loans use 1% of the outstanding student loan balance that you repay under an IDR plan as a monthly payment obligation.
If you have a personal student loan, you can lower your payments by refinancing the student loan. When you refinance your debt, you may be eligible for a lower interest rate or a longer term and a lower monthly payment.
4. Explore your mortgage options
In general, financial experts recommend making down payments of at least 20% as this amount can save you from paying for Private Mortgage Insurance (PMI). However, 20% is not a set requirement and it is often difficult for most homebuyers to have that amount of cash on hand. Depending on your situation, you can buy a home for as little as 3% or less.
There are several types of mortgages that have lower down payment requirements:
- VA loan. If you are a military veteran, you may be eligible for a home loan that is provided and partially guaranteed by the United States Department of Veterans. Qualified participants can be admitted with a 0% discount.
- FHA loan. The Federal Housing Administration (FHA) loans enable first-time home buyers to get loans with as little as 3.5% off.
- Low deposit conventional loans. Some lenders offer conventional mortgages that only require 3% down.
- Fannie Mae HomeReady Loan. This program is aimed at first time low-income home buyers. If you qualify, the minimum deposit required is 3%.
5. Research government programs
Depending on where you live, you may be eligible for down payment assistance programs. Some states even have special incentive programs for homebuyers who also have student loans. For example:
- Kansas Rural Opportunity Zones: In Kansas, individuals buying home in select counties can qualify for up to $ 15,000 in student loan repayment assistance over a five-year period.
- Maryland SmartBuy: If you qualify for the Maryland SmartBuy program, you can buy a home and receive up to $ 30,000 in student loan repayment assistance. A borrower, if two co-borrowers apply for a loan, must be free of student loan debt to qualify.
- Ohio Graduate Scholarships: Graduates can receive up to a 5% down payment on real estate they buy in Ohio. If you sell the house and leave Ohio in less than five years, you will need to repay some or all of the aid received.
Visit the US Department of Housing and Urban Development’s state directory to find out if your state has a down payment support program.
When not to buy a home
If you are worried about juggling student loans and mortgage payments, you shouldn’t be feeling rushed to buy a home. If any of the following scenarios apply to you, it may not make sense to buy a home now:
- You have no flexibility in your budget. If your monthly budget is already reached, buying a home might not be a good idea. While your mortgage payment may be lower than your rent, you also need to worry about additional costs like maintenance, PMI if the down payment is less than 20%, and home insurance.
- They don’t know if you will be staying in one place for a long time. If you are unsure whether to stay with your current employer or your current city, buying a home may not be a good idea financially. Renting would give you more flexibility if you decide to move to a different area.
- You don’t have an emergency fund. If you don’t have money in an emergency fund, it is usually a good idea to put off buying a home until you have some money saved. Otherwise, a single emergency – like a car repair or a broken water heater – could place you in debt.
- You are not prepared for maintenance costs. Saving money on down payment and closing costs is only part of the cost of becoming a homeowner. Experts usually recommend saving 1 to 3% of the home price annually to cover maintenance costs such as roof repairs.
If you don’t feel ready to become a homeowner, it’s okay to wait until the time is right. Carefully consider your finances, career plans, and other long-term goals to help you decide whether buying a home makes sense for you.
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