Many people in the United States have student loan debt. In fact, most sources think that about 43 million people have student loan debt and the average of that is about 30k. While this debt crisis impacts mostly young homebuyers, anyone of any age and any walk of life can be dealing with student loans as it can often take years to pay down the loans. With that much debt, many potential homebuyers think that they can’t get a mortgage in order to buy a home, but that’s not true. If your dream is to be a homeowner but you have student loans, read on for 10 hopeful tips about how to become a homeowner while dealing with student loan debt:
1. Don’t assume you can’t buy a house
First off, don’t automatically assume that you can’t buy a home just because you have student loan debt. While it can be a bit more tricky and involve some compromise, you can qualify for a mortgage while paying off student loans. The biggest thing to keep in mind will be your debt to income ratio.
2. Calculate your debt to income ratio (DTI)
Your lender can help you do this formally, especially when you go through the pre-qualifying process, but you can start out by tallying up your expenses and understanding how much debt you have. Do you have other debt aside from student loans which could include an auto loan, medical debt or credit card debt? Having a basic understanding of your debt, minimum monthly payments and interest rates will help you and your lender to know where you stand financially.
3. Go through the Pre-qualifying process
It is recommended that all first-time homebuyers go through the pre-qualification process when buying a home. That is to say that you speak with a lender, understand your financial situation and get pre-approved for a loan amount before you start looking at homes. It is imperative that you understand how much you can qualify for before looking at homes so you can stay realistic.
4. Avoid more debt
This goes for all potential homebuyers looking for a home, but doubly for those with student loan debt, but avoid other debt until you close on your new home. This is not the time to buy a new car or finance brand new living room furniture. Save other purchases for another time and really focus on the goal of becoming a homeowner.
5. Pay payments on time
Just to avoid large interest rates, you should always pay your payments on time but especially when you’re looking for a new home, you want to pay loans, debts and bills on time. Bills that are constantly late become an issue when an underwriter is reviewing your financials. Even better if you can make more than the minimum payment. If your loan has been in forbearance at any time during the last few years, your lender can help you navigate that in case it becomes an issue.
6. Save for a down payment
This may be very difficult to do while you’re simultaneously trying to pay down debt but anything you have to put towards a down payment will help your file. Even if it’s a minimum down payment, it can really boost your chances of getting approved for a mortgage.
7. Improve your credit score
If you’re paying bills on time and trying to pay down as much debt as you can then your credit score should be in a decent place. You can improve your credit score by not taking on further debt, paying down debt you have and making payments on time. Some student loans are packaged as multiple smaller debts adding up to one amount so if you can pay down the smaller ones first, that will help your score as well.
8. Increase your income
If you’re trying to save for a down payment and pay down debts at the same time, this may be a good time to look at supplementing your income. Maybe you can look at getting a temporary weekend gig like Uber or Doordash. Or maybe you have a skillset that allows you to freelance outside of your traditional role. Another option could be asking for more hours if that is how you are paid. Increasing your income, even temporarily, will help when looking at the debt to income ratio.
9. Shop around
Don’t get discouraged if you are turned down by one lender, as you may have luck somewhere else. Not every lender is the same and not every mortgage company has the same rules. It’s important to be realistic about your housing budget, so maybe it’s a matter of compromising for now and then upgrading later. For example, don’t walk away from a lender if they approve you for a lower amount than you want.
10. Try again when things improve
Sometimes, no matter what you try, things just may not work out. In that case, it’s not a bad thing to stay where you’re at for 6 or 12 more months while you improve your situation. For example, if you’re newly out of college and you are just starting out then your income hasn’t had a chance to grow yet and your situation could look really different in the next year. Or if you are in the middle of paying off a big amount of debt, then things like your debt to income ratio and credit score will improve if you keep diligently working towards it. Remember, just because it’s not right now, doesn’t mean it won’t happen in the very near future.
What other advice would you recommend? Need a referral to a lender for pre-approval? Are you in the market to buy or sell your home? Call and text me at (720) 323-4176 or email me at [email protected]
