Student loan debt is one of the biggest financial burdens Americans face. In 2014, 69% of graduates left school with student loans in tow and the average debt load came to $28,950 per borrower. With tuition prices on the rise, the student debt problem is only expected to grow.
Student Loans and Home-Buying
Having to send hundreds or even thousands of dollars to your loan servicer each month can be a huge obstacle to achieving other financial goals. For 22% of adults, student loans are a barrier to home-buying. While your loans can make home-buying harder, it doesn’t have to be impossible if you know what steps to take.
Know your debt-to-income ratio
One of things mortgage lenders look at when making loan approval decisions is how much of your current income is going towards debt each month. This is your debt-to-income ratio and this number has to be below a certain cutoff in order to qualify for a loan.
For a conventional loan that’s manually underwritten by Fannie Mae, for example, the maximum DTI ratio that’s allowed is 36%. There are very limited circumstances where Fannie Mae allows a DTI ratio as high as 50% but only a small number of buyers would qualify. The limit for an FHA loan is 43% but only 31% of your income can be spent on housing.
Figuring out how much of your income is going towards your loan payments can help you gauge how how or low your debt-to-income ratio is. If it’s above the established limits, you may have to consider refinancing or consolidating your loans, which could lower your monthly payments.
Get your credit in shape
Aside from your DTI ratio, your credit score also shapes your ability to buy a home and it’s especially important to understand how you rate if you’re a millennial. According to Experian, millennials have the lowest credit scores of any generation, with an average VantageScore of just 625.
While a score in that range could qualify you for an FHA loan or even a conventional loan, you wouldn’t be able to get a USDA loan. These loans are geared towards lower-income buyers and they don’t require a down payment, which is great for new grads who aren’t making a lot and don’t have tons of cash to spare.
A 625 credit score would also mean paying more in interest, since you wouldn’t qualify for the best rates. Working on improving your score before you buy could save you thousands of dollars in interest if you’re able to get a better rate. Making sure you’re paying your student loans on time is the best thing you can do to raise your score.
Be realistic about what you can afford
One of the worst mistakes you can make when buying a home if you have student loan debt is overestimating how large of a mortgage you can take on. Even if you’ve lucked out and landed a decent-paying job right out of school, you shouldn’t spend more on a home than you need to just because you have the means to pay for it now.
Look at the long-term and consider how long you’re going to be making your loan payments. Then, consider your career track. A survey from Deloitte found that 66% of millennials plan to change jobs by 2020. Only 16% said they hoped they’d be with their current employer 10 years down the road.
If you’re planning to switch jobs any time soon, you should consider whether you’d still be able to sustain your student loan payments and keep up with an expensive mortgage. Taking on a bigger loan can create unnecessary financial pressure so you need to be cautious about how far you stretch your budget.
That it. No revelation or additional informational that the typical person would not already know.