Are you looking to purchase your first home – either in the next month or year, but feel that your student loan payments are holding you back? Don’t get discouraged and push the dream of owning your first home aside. It is possible for you to be approved for a mortgage while you are still paying off your student loans; you just need to manage your debt-to-income ratio and overall credit score. Make sure you keep these main things in mind before you begin the homebuying process.
DEBT-TO-INCOME RATIO (DTI)
A mortgage lender will calculate your debt-to-income ratio. This ratio will determine your ability to make monthly payments on your future mortgage. Your debt-to-income ratio is calculated by adding up all of your monthly debt payments, including your expected mortgage amount and then divided that by your gross monthly income (earnings before tax and other deductions). The maximum acceptable DTI is roughly 43%. However special government programs and lenders might approve borrowers with higher DTI ratios depending on certain criteria.
REFINANCE OR CONSOLIDATE YOUR STUDENT LOANS
If you have the ability to pay off your student loans, pay them off as quickly as possible by reducing other monthly expenses and paying more than the minimum amount.
However, depending on your loan situation, you might be able to refinance or consolidate into a longer repayment term for lower monthly payments. Or you could enroll Federal Loans into other repayment programs better suited for your financial situation, which could improve your DTI ratio as well.
Your student loans play a major part in determining your credit score, which factors into the approval of your future mortgage. Paying your monthly student loans and other bills on time each month is a great way to build good credit.
Your credit score not only helps lenders evaluate whether your future mortgage loan should be approved but also the mortgage’s interest rate. If you have a high credit score, you are eligible for lower interest rates and a variety of loan options. On the other hand, those with unfavorable credit are faced with higher interest rates and less loan options and possibly denial of a mortgage request.
However avoid quick fixes. Don’t close existing credit cards just because you are not using them at the time. Also do not pay off all your credit cards at once (unless you do this every month). Don’t drastically change the way you handle your credit. Such changes can be viewed as a quick fix and negatively affect your credit score. Therefore, if you plan on purchasing a home in the next few months, pay your bills in a timely manner/as you normally do, don’t close any credit cards, avoid opening new credit cards, and avoid making other large purchase.
To obtain your credit score, you can request a FREE Annual Credit Report here.
Other options to consider include bringing in a co-signer on your home loan or finding a way to make a bigger down payment to reduce the amount of money you need to borrow to finance your home.
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