If you’ve recently graduated from college and you’ve racked up student loans, you’re in good company. Recent reports have shown that nearly 44 million borrowers owe a staggering $1.48 trillion in student loan debt. For people ages 20 to 30 years old, the average monthly student loan payment is $351.
In a 2017 survey by American Student Assistance, more than half of all young workers worry about repaying their loan – which may lead to delaying buying a home. And when home ownership is on your mind, student loan debt can be a big factor in how much home you can afford.
When seeking a mortgage, your ability to be approved is based on 3 main considerations:
-Your credit score
-How much money you can use for a down payment
-How much money you make relative to how much money you owe – referred to as your debt-to-income ratio.
There is a bright side to your student loan balance compared to other types of debt. Student loans are generally viewed by credit agencies as installment loans like home mortgages and loans for automobiles. Credit card debt has a bigger impact on your credit score because it’s considered revolving debt – meaning your balance can go up and down over time. Here’s an example: carrying $25,000 in credit card debt is likely worse for your credit score (and your ability to get a home loan) than that same amount of student loan debt.
HOW CAN YOU GET A HOME IF YOU HAVE STUDENT LOAN DEBT?
If student loan debt is part of your financial equation, these tips could help you purchase a home:
Pay your bills on time.
Just like any financial obligation, making your student loan payments on time and in full makes the biggest impact on your credit (and your ability to get a mortgage). If you pay on time, it’s only going to help maintain or improve your credit score.
Modify the terms of your loan or loans.
Another option to reduce your monthly student loan payment is to opt for a graduated repayment plan – meaning the payment starts low then rises every two years. The lower payment helps improve your debt-to-income ratio, which in turn makes it easier to qualify for a mortgage. This generally works well for younger workers who will likely have rising income as they become more experienced in their careers.
Not all loan programs will consider a reduced payment when qualifying an applicant.
Your FirstBank Mortgage loan expert can assist you to select the most appropriate loan program for your situation.
If you have multiple student loans at various amounts and different rates of interest, you may be able to lump your balances together – hopefully at a lower interest rate – while potentially extending the payment term over a longer period of time.
Thankfully, there are several options for first-time home buyers with student loan debt, including those with 100 percent financing and/or low down-payment requirements. Examples include Federal Housing Authority (FHA) loans that allow for a slightly higher debt-to-income ratio (up to 43 percent) and can have a lower minimum credit score. And if you or your spouse has served in the military, the VA Loan Guarantee program is available to you as part of the G.I. Bill.
Finally, if home ownership is in your future, now’s the time to talk with a professional who can provide guidance for your specific financial situation.
If you have questions about how your student loan debt will impact your ability to buy a home, we’d love to talk with you. To search for a loan expert in your area, click here.