6 Tips for Buying a House with Student Loans

On average, a good number of debtors are still in arrears of between $20,000 to $25,000 on their student loan balances. According to the Federal Reserve data, as of 2018, 43% of American college graduates have taken a student loan debt. This majorly affects many millennial’s who are looking at buying a home with student loans. Do not fret…you have options!

When such debts accumulate, they hold back potential home buyers in two major ways. First, they have to deal with the problem of a higher debt-to-income ratio, which forces lenders to steer off from their loan requests, and second, it becomes even harder to save for a down payment requirement.

However, while a student loan may make getting a mortgage hard, it should not preclude anyone from buying a house as this guide explains with the following six tips for buying a home with student loans. Buying A Home When You Have Student Loans

Pay More Attention to Your Credit ScoreHow to Buy a Home with Student Loans

A credit score is defined as the numerical expression founded on the analysis of one’s credit files and history, often to show their creditworthiness. It is a statistical expression used to evaluate whether a borrower qualifies for a loan based on how they have been paying their loans in the past.

Usually, loan lenders use the score to assess the probability of them advancing a loan, or not, for example, a mortgage credit.

One of the most considered items by lenders, when they measure the creditworthiness of a debtor, is the latter’s credit score. The FICO® credit scores are the most commonly used, and they can range from between 350 to 800 (the higher it is, the better).

If a debtor has a credit score of at least 750 or more, they are considered to have an excellent credit score, but one with 600 and below is considered to have a poor credit score.

When applying for a mortgage, this credit score matters a lot. Every credit bureau collects information about your credit history from which they develop a credit score for you, and in return, lenders use it to determine the risk levels of advancing a loan to you.

If your credit score is weak, you should focus on improving it or report it to a credit bureau immediately if you have a reason to believe it is erroneous.

According to FICO®, one may also increase their credit score by paying down installment debts and in time. This is because a loanee who has missed payments is flagged as a ‘score decreaser,’ and this affects their credit score negatively.

Additionally, one should avoid having high revolving balances if they need to have a healthy credit profile and gain favor before mortgage lenders. Monitoring your credit score is smart advice and very easy to do.

Focus on Managing Your Debt-to-Income Ratio

The debt-to-income (DTI) ratio is defined as the personal finance measure used to compare one’s monthly debt payments to their monthly gross income. The gross income is what one is paid before any taxes, and other deductions are made, from which a percentage of it is used to pay one’s monthly debts; debt-to-income ratio. To realize it, it is all the monthly debt payments that you have to make divided by your gross monthly income.

Most lenders also gauge the creditworthiness of a borrower by checking their debt-to-income ratio and how it can influence their repayment strength. In such cases, this affects the interest rate that one receives, which could also affect their readiness to take a mortgage or even instill fear in them.

You can calculate your DTI ratio using the following formula and check whether you have the ability to repay a loan and, therefore, get one.

DTI =  Total of Monthly Debt Payments

Gross Monthly Income

A low debt-to-income (DTI) ratio means a debtor has a good balance between their debts and income. In other words, maintaining the DTI ratio at, for example, 15% means that 15% of the individual’s gross income will go towards debt settlement. On the other hand, a higher DTI ratio may mean that the individual has too much debt for them to settle their debts using their gross income.

A loan borrower can lower their debt-to-income (DTI) ratio by either of these two ways:

  • Reducing your monthly recurring debt by repaying often and regularly.
  • Earning more income to increase your gross income: – you may ask for overtime or take on some side hustles.
  • Better yet, do both.

Additionally, you may:

  • Lower your credit utilization rate.
  • Ensure to pay your bills on time. Here, you may set up auto-pay, if need be, since late payments may make your credit score to start plummeting.
  • Avoid new credit.

Consider Down Payment AssistanceHow to Afford A Home when You Have a Lot of Debt

Even when a student loan makes it hard for you to save for a mortgage down payment (and you do not have any money coming from donors, family members, or gift money), you are not entirely out of luck.

Essentially, you may explore several other avenues of assistance or programs that may help you to cover your down payment and the closing costs on your loan. Closing costs are the expenses that are over and above the total price of a property that a buyer and seller normally incur for them to complete a real estate transaction.

Any such assistance is usually in any of the following forms:

  • A Down Payment Grant: – such grants are usually interest-free and do not have to be repaid.
  • Traditional Second Mortgage: – this is also another program where one can get assistance from via low-interest loans. The loans are usually paid off monthly, just like the initial one is.
  • Forgivable Second Mortgages: – such a loan is technically a second mortgage loan on top of the initial one used to finance your house. The debtor may be forgiven if they live in the house for a certain number of years.
  • Matched Savings Programs: such programs encourage loanees to save funds in a specially dedicated down payment savings account. In this case, the agency or institution that is offering the program matches the saved funds (usually up to a certain point) to process a loan for the individual.

For one to qualify for such programs, they will need to:

  • Be first-time homebuyers.
  • Attend and complete a homebuyer education course.
  • Have their income ranging from the minimum up to a certain threshold.
  • Commit to a certain amount of savings per month.
  • Be a member of the military, a public servant (EMT, teacher, firefighter, among others), or veteran.

Other down payment assistance may come from:

    • USDA loans: – these are zero-down mortgages designed for suburban and rural homeowners.
    • FHA loans: – these are federal loans advanced to loanees through the Federal Housing Administration.
    • VA loans: – these are loans issued out to people in the military service.

You may also want to look out on some other federal, local, and state mortgage assistance programs. Remember, you do have choices and can still start preparing for buying a home with student loans.

Find A Co-Borrower to Help You Buy a Home

A co-borrower is the additional name entered on loan documents along with yours, which makes the owner of the name equally responsible for the loan. This is yet another great way of securing a mortgage loan where you can find a fellow grad, friend, or family member who may be in a similar situation as yours. If you apply for the loan jointly, they will become a “co-borrower” and help to relieve you of the hurdle of having to shoulder the entire burden alone.

The major benefit of having a co-borrower is that it will allow your incomes as well as credit profiles to have a positive impact on the application.

Applying for a loan with a co-borrower also means a number of other benefits. Essentially, it will:

  • Help to lower the interest rate to be paid by each co-borrower, as long as they all have solid financial foundations.
  • Translate into the probability of a higher loan balance.
  • Ultimately make the approval process much easier.
  • Allow the co-borrowers to pool together a larger amount for the down payment, thereby lowering the overall monthly housing costs and monthly interest.

Refinance Your Student LoanEverything to Know About Home Buying and Student Loans

When lenders are gauging your creditworthiness, they also consider your monthly student loan payment trends. If you plan to own a home yet are still servicing your student loan, the best idea would be to refinance the existing loan and improve your credit history. Student loan refinancing can help you to lower your monthly payments, which will also help you to maintain a healthy credit record and gain favor in the eyes of a lender.

A low-interest rate helps you to signal potential lenders that you are on the right track in settling your student loan faster. Focusing on the interest may, however, not be with every lender or loanee since there are different parameters applied by different lenders. To be on the safe side, get a student loan refinancing lender that offers interest rates as low as 2.5% to 3% because this will be substantially lower than the in-school private loan and federal student loan interest rates.

While looking for student loan refinancing, there are some key things that you should be well aware of. Ideally, you should know that:

  • Different loan institutions have varied eligibility requirements as well as underwriting criteria that may include minimum income, monthly free cash flow, debt-to-income ratio, and the credit profile of the potential loanee.
  • Student loan refinancing works with private student loans and federal student loans.

Get Mortgage Loan Pre-Approval

The other essential attempt at becoming a homeowner by taking a mortgage is through a mortgage pre-approval. Normally, people do not go this route, but you may want to try it out and check whether it will work for you; arguably, it should.

When people are looking at buying a home and do some home improvement works they usually search for the home to buy and then apply to get a mortgage. That is the traditional model, but as a student who is repaying a student loan, you can switch this and do it in reverse order.

Yes, you can get pre-approved with a particular lender first, and then you will know how much is the home that you can afford depending on your employment status, credit profile, assets, income, among other considerations.

Before a lender can decide to pre-approve a mortgage for you, they will need to consider several factors as follows:

  • The loanee’s credit history.
  • The loanee’s credit score.
  • Their debt-to-income ratio.
  • Assets and liabilities.
  • Income
  • Employment history

There are several takeaways for you to have when going through the pre-approval process. They include:

  • Take on several lenders to allow you to shop for different interest rates and land the best deal.
  • The first step to the pre-approval process is to fill out a mortgage application and supply the lender with the Social Security number for a credit check.
  • A home seller will also need to see the mortgage pre-approval letter. In some cases, they may also need proof of funds to show that you are a serious buyer.
  • You will also be required to provide extensive documentation to show your job history, income tax returns, assets and liabilities, and job history.
  • After the lender reviews your application, they may pre-approve it, give you pre-approvals, but with conditions, or reject the application all the same.

Final Buying a Home with Student Loans Advice

To successfully manage healthy student finances, there are some key things that one ought to have in mind; paying bills on time, reducing the amounts owed, and applying for new credit only when it is necessary. Even though this may seem overwhelming to most people with a student loan, the goal of achieving a higher or improved credit score is met.

Essentially, you do not need to be debt-free for you to buy a home, although it may be a bit difficult to secure another loan when you have an existing and heavy debt. If you are keen enough with the tips explained in this guide, it would be much easier for you to secure a loan and become a homeowner while still paying your student loan. The key idea here, though, is to make your financial situation more stable before you can invest in a home or take a loan for it.

Additional Student Loan Resources

Understanding all the nuances involved when trying to buy a home when you have student loans can be overwhelming. It can also be frustrating if you do not understand where to begin, what you should focus on, and how long it may take you. Fortunately this article covers many of the key steps to pay off your student loans and qualify to purchase a home as quickly as possible.

If you are trying to get an FHA loan did you know there are specific FHA student loan procedures you should be aware of? It is wise to discuss you options with a lender to ensure you know what you will qualify for and documentation you will need to provide. Follow the advice offered by FHA Lenders in the link above and have piece of mind knowing you are on your way towards owning your own home!

If you found this article on how to buy a home with student loans helpful, please share it so other consumers can also benefit from the information. All About Buying A Home with Student Loans

What You Need to Know About Buying a Home with Student Loans

About Anita Clark Realtor

Anita Clark has written 612 posts on this blog.

Anita is a residential Real Estate Agent in Warner Robins Georgia, with Coldwell Banker Access Realty (478) 953-8595, aiding buyers and sellers with all their real estate questions on her Warner Robins blog.