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Thursday, Dec 7, 2023
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Will Your Student Loans Impact Home Buying?

Many millennials still don’t have their own home. While many of them are interested in making a home purchase, they are unable to do so due to financial difficulties. One of the main reasons why most millennials are not homeowners is due to their student loan debts.

Millennials have an average student loan balance of $38,877. Since they are still paying their student loan debts, they find it difficult to save enough money for a home purchase. Even with the availability of affordable home loans, many are thinking twice about getting a mortgage.

How Student Loans Affect Home Buying

But because of the following reasons, it can make buying a home a more difficult task.

Hinder Down Payment Savings

Local mortgage brokers require different down payments depending on the type of mortgage. Saving enough money for a down payment can be difficult when you are already struggling to make ends meet. Since you are still paying for your student loan debt, it can be tricky to come up with enough cash for the down payment.

Impact Your Credit Score

The higher your credit score, the easier it will be for you to get approved for a mortgage. A higher credit score also helps you land a better home loan with a favorable interest rate. While consistent student loan payments can build up your credit score, missed payments can make a dent in your score.

Affect Your Debt-to-Income (DTI) Ratio

Lenders will check how much debt you currently have in your name by calculating your DTI ratio. They ideally prefer borrowers with a DTI ratio lower than 36%. Your mortgage should not go beyond 28% of your mortgage payment.

Should You Buy a House While Still Paying Your Student Loan Debt?

Many millennials are torn between making a home purchase while paying for their student loans and paying off student loan debts before buying a house. Note that each situation is different. What you need to consider is what you are comfortable doing.

Paying off your student loan debt first makes sense if you say yes to the following cases.

  • You are okay with renting for a little while longer
  • Your DTI ratio is too high
  • You are not yet sure where to take permanent residence in
  • You don’t want to own a house and not be able to handle the costs
  • Your savings are not enough for a down payment

If, on the other hand, you have the following reasons, then buying a house while repaying your student loan can be a good idea.

  • Your student loan has low interest
  • DTI ratio looks good
  • You have enough money saved up for the down payment
  • Your family needs more space
  • You can handle homeownership costs
  • You no longer want to rent

Buying a House While Paying Off Your Student Loan Debt

Despite you still paying your student loans, there are ways you can make a home purchase a reality. Here are five tips you can consider.

Increase Your Credit Score

One’s credit score tells lenders how risky one can be as a borrower. The higher your credit score, the easier it is to get pre-approved. You can start increasing your credit score by:

  • Paying bills on time
  • Avoiding new loans and credit card applications
  • Reducing your credit utilization rate
  • Keeping long-standing accounts open

Improve Your DTI Ratio

A better DTI ratio will help you find a mortgage lender willing to approve your mortgage application. You can do this by:

  • Looking for another income source to boost your DTI ratio
  • Paying off your debts
  • Consolidating student loans
  • Consider income-driven repayment plans

Explore Down Payment Assistance

There are many assistance programs available for first-time homebuyers. These can help you with your down payment and even cover closing costs. Agencies offering down payment assistance are likely to evaluate your DTI ratio, credit score, and other factors when evaluating your application.

Leverage Mortgage Programs for First-time Home Buyers

State-based and government agencies offer mortgage programs for first-time homebuyers. These usually have lower interest rates, lower DTI and credit score, a little-to-no down payment requirements.

Ask for Down Payment Gift Money

Some mortgage loans accept gift money as a down payment. With a sizable down payment, you can increase your chances of getting mortgage approval. Just make sure you acquire a gift letter stating that they don’t expect you to pay back their gift money.

Find a Co-borrower

You can also team up with a loved one to apply for a home loan with you. Both your debts and credit score will count during your application. If you have a weak financial position, your loved one with a high credit score and DTI ratio will help bring up your eligibility for a loan.

There are ways you can get around buying a house even if you have student loan debts to pay. It is crucial that you consider all factors first before finalizing your decision. If you believe you can your student loan debts and a mortgage at the same time, you can keep these tips in mind to aid your home buying process.

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