Most student loan borrowers have at least $25,000 to $50,000 in outstanding student loan debt after they finish college. This (often lingering) debt deters many former students from pursuing homeownership. Are there ways to achieve the dream of homeownership even while carrying substantial student loan debt? Here are some tips.
Student loans can have a big impact on your debt-to-income ratio (DTI). This metric is used to determine your monthly debt payments and includes things like your credit card bill, car loan, and student loan payments. A mortgage lender is typically looking for a maximum DTI of 28% before factoring in your mortgage and a DTI of 40-50% after factoring in your mortgage. This means that they expect a maximum of 28% of your monthly income to go to debts other than your mortgage. For many people with student loans, their DTI is too high before factoring in a mortgage payment.
If you find yourself with a high DTI, there are some things you can do to improve your chances of getting approved for a mortgage.
1. Refinance. Refinancing or consolidating your student loans can allow you to reduce your monthly payment and get a lower interest rate meaning you would pay less over time as well.
2. Increase Income. You could also make sure you are getting the best investment on your degree by asking your employer for a raise. If you are not working in your degree field, consider looking for a second job that would allow you to use your degree - or a better-paying first job - to generate some more income to offset your DTI.
3. Deferment. It is even possible to defer your student loans for a period of time. This could temporarily lower your monthly debt payments and therefore your DTI.
4. Improve Your Credit Score. Raising your credit score can help you secure a better interest rate which can lower your monthly mortgage payment. Reach out to creditors about lowering monthly payments or getting a lower interest rate. Focus on paying down credit card debt as much as possible.
Getting pre-approved for a mortgage is the first step toward buying a home. During the pre-approval process, a mortgage company will be able to tell you if your DTI is too high for approval. If it is, you can take some steps to lower your DTI and increase your chances of approval. For conventional loans, you need a DTI under 43% (after factoring in the mortgage you are seeking approval for) whereas government loans will qualify you with a DTI up to 50%.
It is important to look into all loan types that you may qualify for. FHA Loans, Home Possible/HomeReady loans, and First-Time Buyer Programs all offer different paths to ownership for those with higher DTIs and lower incomes.
You can absolutely buy a home while carrying student loan debt—but you need to be aware of your DTI and how that will impact your chances of loan approval. If you are struggling with debt management, Veitengruber Law can help. Restructuring your debts or creating a manageable payment plan can be all you need to get on the path to homeownership.