Student loans can assist you in achieving your educational and career goals. But high student debt can also affect your plans, like your ability to purchase a house.
Experts have predicted that 2021 will be a year of more home sales than any year since 2006. However, numerous people that want to move to affordable homes or take advantage of the historically low mortgage rates already have massive student debts.
Almost 45 million U.S. citizens have outstanding student loan debts across the nation. However, just because you have student loans doesn’t mean you can’t buy a home.
Of course, numerous factors determine your mortgage eligibility. And even though student loans can massively affect buying a house, they shouldn’t keep you from being homeowners. Here’s what you need to know:
Student Debt Can Increase Your Debt Ratio
Yes. Student loans can affect your ability to buy a home. That’s because when you apply for a mortgage, loan servicers consider many factors to know if you’re trustworthy. One of the factors is your debt-to-income ratio (DTI).
You calculate your DTI by adding all the debt payments every month, including car payments, rent, student loans, and credit card minimums. Then divide these by your gross monthly income (the amount you make before taxes).
According to the Consumer Financial Protection Bureau, you can’t have a ratio of over 43% to obtain a qualified mortgage. A qualified mortgage has more stability and has specific protections for borrowers. And that includes the ability to pay back your loans.
However, many loan lenders have a far lower threshold. For example, if your student loans take 20% of your income, you may not get approved if your monthly mortgage payment is 30% of your income.
Student Loan Can Affect Your Credit Scores
Lenders use your credit score to evaluate your financial history. It helps them determine how worthy you are in terms of buying a house. The credit score, however, is based on numerous factors:
- The amount of student loan debt you have,
- The kind of student you have,
- Whether you make on-time payments
Most borrowers have many variant credit scores depending on the model used. So loan services decide on the one to use. But they usually use a FICO Score when assessing mortgage applications.
Just like other debt types, student loan debt can impact your credit scores in a good and bad way. You can have a bad credit score when you make late payments or miss a payment. Every late payment you make stays on your credit report for seven years.
On the other hand, when you make on-time payments every month, you can improve your credit scores. So it’s advisable to set up student loan auto payments. That way, you never miss a payment. You’ll also be able to boost your credit and put your mind at ease.
Another way to increase your credit scores is to keep your credit utilization ratio low. It’s advisable to keep it below 30%, the lower, the better. The credit utilization ratio shows how much available credit you are using.
Reduce Your Student Loan Debt To Afford A House Payment
Maybe you want to buy a house, but your debt-to-income ratio is high to be eligible for a mortgage. If that’s the case, there are several options to take to decrease your student loan debt.
Increase your student loan monthly payment
You may have to decrease your discretionary spending, such as purchasing new clothes or ordering food and direct them toward your monthly student loan payments. Increasing your payment on your student loans every month can gradually improve your debt-to-income ratio
Refinance or consolidate your student loans
If you have federal student loans, you can combine all your federal loans into one student loan with a single monthly payment. If you choose this route, it won’t decrease your interest rate, but the loan consolidation can make it simpler to monitor your debt and make on-time payments.
Federal student loan consolidation can also make your repayments flexible. If you have private student loans, find out more about refinancing and loan consolidation options provided by credit unions, banks, and online lenders.
Keep in mind that if your DTI and credit score are low, it can be difficult to refinance your student loans at a lower interest rate.
Closed School Loan Discharge program
There are many school loan discharge programs available. Listing them all would take an immense amount of time. We can’t list them all but here are some for references.
When it comes to getting approved for a mortgage, credit scores and DTI are not the only factors that lenders consider. If you don’t have impressive numbers on your DTI and credit scores, you have to make a higher down payment.
You can ask your friends and family members to help you make a down payment. Remember that your loan lender can set percentage limits of the down payment that can be gifted.
The lenders will also require that you make documentation such as a gift letter to show that the money is a gift, not a loan.
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