For many first-time home buyers, there’s one thing that holds them back the most from moving forward on a home: student loan debt. This is understandable, as many people might worry about taking on the monthly costs of a mortgage while also attempting to pay back their student loans. But student loan debt need not be the deterrent that it typically is. There are many options available to help you settle on a home and still make good on your student loan payments. Here’s a few things to keep in mind:
Your debt-to-income ratio (DTI) is a metric used by lenders to assess your ability to make your loan payments each month. This percentage is calculated by dividing your monthly debt by your monthly income. This allows lenders to get a bigger picture of how much income you would have to direct each month towards a mortgage payment and whether or not you could afford to do so. Your student loan payments are generally included in the debt portion of your DTI, but there are a few ways out of this. One thing that the DTI doesn’t include is debt paid by someone else, so if you’re fortunate enough to have your parents or other relative cover your student loan payments, your DTI will be lower. Additionally, student loan debt can be ignored if you have less than 10 months left to pay back your loan(s). Many mortgage lenders have also relieved some of the weight that the DTI carries in your mortgage application, instead placing greater importance on something like your credit score.
Many loan options such as FHA loans and VA loans offer perks like low interest rates or low down-payments, perfect for first-time home buyers. Additionally, having student loan debt may qualify you for even more benefits, such as a reduced role in your DTI. Read more about these and other loan options here.
If you’re still concerned about whether or not you can handle a mortgage right now, here’s a few things to think about:
What are my needs?
What are you looking to get out of owning a home? Is it necessary for you to buy a home at this time? If you’re not too sure about settling down right now, then a home might not be the best option for you, even if it would be a huge milestone. It’s important to think critically about your needs and whether or not a home will help you meet them. A close analysis of your current payments, commitments, and obligations can help you in thinking about how home ownership would work for you, if at all. Additionally, if you do decide to move forward on a home, don’t be afraid to get a second opinion on any offers you’ve received.
What are my plans?
What are your plans for the future? Do you intend to go back to school at some point? Are you not certain of your job security? Taking the time to do some future-planning is incredibly valuable when deciding whether or not to jump on a home. If you think that graduate school is a possibility, you might not want to derail those plans by taking on the costs of a mortgage. However if your job offers graduate school assistance, then your financial situation may be flexible enough to accommodate mortgage costs. Another thing to consider is job security. Do you feel like your job is stable? Or are you either concerned about your job security or considering moving to another company? Factors like these may not only affect your decision to get a mortgage in the first place, but also affect your mortgage eligibility, if a lender doesn’t think your job would provide enough stability to handle a mortgage.
What is my support?
What sources of external support do you have? Whether it be qualifications for governmental assistance or even financial support from your parents, it’s important to consider your opportunities for support and assistance in your mortgage payments, financial situation in general, or both. The presence or absence of these factors can greatly influence your mortgage application decision.
Not a first-time buyer? Some of these guidelines may be less applicable, but there are still ways to ease your student debt burden. One option is to use your home equity to pay off student loans. If you’re choosing to refinance or even take out a second mortgage, you can pay off one or more student loans through the use of a conventional loan. As long as you’ve maintained at least 20% equity in your home, you can use this option to take care of some of your student loan debt.