The decision to balance student loan debt with homeownership is an audacious one, and quite satisfying if it’s well-executed. Find out how your degree type and student loan repayment program influence your ability to secure different types of home loans – and learn what you need to do to demonstrate your capability as a borrower.
Purchasing your first home is a huge investment, and an even greater accomplishment. To ensure your success, it’s imperative to have your finances in order. In particular, there may be much speculation and concern surrounding the impact of student loan debt on home-buying achievement. Perhaps you’re wondering how much your loan payment obligations will interfere with your mortgage responsibilities. It’s quite possible you’ve already struggled to save for your down payment because your student loan debt got in the way.
How will these issues continue to collide for years to come?
Good news. Research from Zillow indicates that your student loan debt shouldn’t be too much of a pain point when it comes to homeownership. The caveat is in the type of degree you have.
Of course, there are numerous other factors that play into your chances of securing a mortgage. The debt-to-ratio is dynamic, and the different types of mortgage loans even factor into the equation.
The negative impact of student loan debt on home buying may not be much more damaging than other types of debt, such as car loans and credit card balances – but it does still play a substantial role in the process. Millennials in particular understand this burden, because they feel more pressure to earn college degrees more than any other generation has.
When assessing favorability for a mortgage loan, the lender will consider points such as your income and employment history, your assets, your credit score – and your monthly debts. You may have known this fact, but did you know the dollar amount or percentage of your student loan payments that is required to be included in the calculations varies based on the type of mortgage you’re hoping to receive?
Many – if not most – student loans are supported by federal agencies. That means securing a government-backed mortgage might be challenging. This is especially true if you haven’t been consistent in your loan payments. Fortunately, there are several types of student loan repayment plans, so it is quite possible to find one that works well for you. Each of these options, from income-sensitive and extended repayment plans to income-driven and graduated repayment plans, influences mortgage eligibility differently.
The next step of the journey is to explore the types of home loans and consider how student loan debt fits into the puzzle.
Now that you understand the most commonly-used mortgage options and how they relate to student loan debt, it’s crucial to learn what other matters are considered when determining eligibility. When assessing if you are able to fit a mortgage payment into your budget, lenders focus on front-end and back-end debt-to-income ratios.
To figure out your front-end ratio, it is necessary to divide the estimated monthly payments by gross income (also monthly). Taxes, interest, and principal are all included in these estimated payments. Many lenders require that the ratios fall between 28 and 36.
Your debt, which includes your outstanding student loan balances, car loan payments, minimum credit card expectations, and child support obligations, factor into your back-end ratio. The total of your monthly amount owed is divided by gross income (again, monthly). It’s best if this ratio falls under 36, and don’t expect much if it is over 41. In that case, your only hope is to have a stellar credit score or have a sizable down-payment to offer.
Despite all the requirements and the work it takes to meet them, landing a mortgage loan is far from impossible. With the right strategy and thorough preparation, you can continue on the path to homeownership. Here are some suggestions to help you along:
Finally, know that it is always best to get pre-approved for your loan, because sellers will look more favorably upon you as a buyer and you will know exactly what your limitations are in terms of your new home. Seek the services of a reputable mortgage consultant to help you navigate the system.
Purchasing a new home is a huge life milestone, and debt impedes the process for many people. Your student loans won’t necessarily prevent you from becoming a homeowner, but they won’t help. You must be prepared to carry the load of at least two substantial debts.
With the right planning and insight regarding the opportunities and repercussions, however, there is no reason to allow student loan debt to get in your way.