Having substantial student loan debt can be a strong deterrent for millennials from achieving important milestones in life such as purchasing a first home. Fortunately with responsible planning and budgeting it doesn’t have to be one or the other. Follow these tips so you can have your degree and buy a home too.
Learn how student loans affect mortgage lending. It’s important to understand how student loans affect your eligibility for a mortgage in the eyes of a lender. Most mortgage lenders will calculate your debt-to-income ratio (DTI) to determine if you’re able to make monthly payments on the new mortgage. The ideal ratio is 28/36 where 28% of your income is spent on housing costs and 36% of income is spent on overall debt. Having a high DTI will not automatically disqualify you from a home loan, but you need to decide if taking on a loan with a high DTI is something you will be comfortable with and able to afford.
- The best option for a high DTI is to either decrease debt or increase income. This can be achieved by frugal budgeting and tracking expenses. If you already are doing so and still have a high DTI, consider picking up a second job to increase your income.
- Depending on your student loan situation, you may be able to refinance or find income based payment options. While this may help your DTI, it depends on the type of mortgage you are applying for. Some underwriters will base their decisions on overall student loan balance rather than monthly payments. Keep this in mind while shopping for a lender.
Find a financially attractive cosigner. If you know someone (a parent, friend, relative, etc.) who could make your finances look more attractive and would be willing to cosign for you, take advantage of it. Perhaps lenders find you too risky to approve you for a decent loan with low interest rates. A financially sound cosigner that lowers your risk may be the best option.
Save up for a down payment. Down payments don’t have to be a set 20%. In 2015 the average millennial could only put down 7%, so even 10% down could get you a better rate with lenders.
Check out local, state, and federal assistance programs. Most states and cities offer down payment assistance programs that are acceptable to lenders. Some local programs will even help you if you want to build a new home. Qualifying for a Federal Housing Administration (FHA) loan could mean a down payment as little as 3%. If you’re a veteran VA loans require 0% down.
Take some time to meet with a REALTOR® for advice on all your home buying options. This entire process can seem confusing and even impossible with your student loans. Real estate agents are here to help you map out goals and answer questions to ensure you will make the best decisions for your future.