Are student loans holding you back from becoming a homeowner?
In a 2017 study by American Student Assistance, 55% of student loan holders said their debt is causing them to put off home ownership. Just this year, a study by the National Association of Realtors concluded that 80% of millennials do not own a home. Of those who do not own a home, 83 percent of those say that student loan debt is holding them back from purchasing a home. However, student loan debt does not mean you cannot get a home loan. Here are a few things you can do to put you on the path to sustainable home ownership.
One of the first things that a mortgage lender will look at when considering you for a home loan is your DTI (debt to income ratio.) There are two types of DTI ratios.
Front End DTI ratio is calculated as housing expenses (such as mortgage payments, mortgage insurance, etc.) divided by gross income.
Back End DTI ratio calculates the percentage of gross income going toward other types of debt like credit cards or car loans.
Your monthly student loan payment is calculated into your back end DTI along with any other debt you have, like credit cards and car payments. Some loan programs will let you have a DTI up to 43%. Even so, because DTI is calculated based on your gross income (income before taxes) and does not account for all expenses, think healthcare and food, you should aim for a DTI around 36%. If your DTI is too high then there are options for you to consider. The lower your debt-to-income ratio, the safer you are to lenders and your finances will be better. Paying down high interest rate credit cards is one way to lower the amount of debt you have. If you have federal student loans, consider applying for a repayment plan that is income driven. If you do not have federal student loans then you can try a using a private lender to consolidate your loans into one payment which may lower the amount you pay each month. Lowering the amount you owe each month for your student loans will free up money for a mortgage payment.
The second thing considered is your credit score. One thing to know and keep in mind is how your credit score is calculated. Fair Isaac, the makers of the FICO score, give the weights of various criteria that they look at: 35% payment history, 30% amount owed, 15% length of history, 10% new credit, 10% types of credit used. Because the most weight is given to payment history, it’s important to make on time payments to anything that could affect your credit score including student loan payments, car payments and credit cards. Your credit score helps mortgage lenders determine how likely you are to pay back your loan. All mortgage programs require that you meet a minimum score. Each program is different and some programs require higher scores than others. The higher your credit score the more favorable loan options available for you. If you’ve had credit problems in the past and want to learn how to fix them, then your housing counselor is an excellent source to help get you back on track. If you have completed our class then call for a follow up appointment. If you haven’t taken our class, then you can sign up here: www.avenuecdc.org/homeownership/buying-a-home/
You can also consider moving to a cheaper housing market. Real estate values are regionalized so you may get more for your money in one city as compared to another. While it may be hard to pack up and move to a new city, it may mean the difference between becoming a homeowner sooner or waiting. Additionally, purchasing only what you can afford is a great way to ensure you do not stretch yourself too thin. Your first house doesn’t have to be your last house. You may not get a pool or gourmet kitchen in your first home but you can always upgrade to another home once you build up equity. Remember, homeownership is a great tool for gaining wealth.
Home ownership is available to you even if you have student loan debt. If your dream is to become a homeowner, the first step is to take our Homebuyer Education class. We are here to help you realize your dream of home ownership.