Qualifying for a Home Loan with Student Loan Debt.
Millions of Americans find themselves with substantial student debt after graduating from college. Significant student loan debt makes it difficult to buy a house for many reasons. First, those monthly student loan payments make it hard to save for a down payment. Also, potential borrowers with a boatload of student debt are less attractive to lenders. The more debt borrowers are carrying, the greater the risk to the lender.
Still, it’s possible to secure a mortgage for a new home while paying down your student debt. You’ve got to dot all your i’s and cross all your t’s, though. And, hopefully, in the time since graduation, you’ve prioritized making on-time payments to improve your credit score and landed a high-income job to justify that student debt.
Financing a home is a big undertaking that can be a vital step towards financial freedom if you’re adequately prepared. Carefully managing your student loans and considering how they’ll impact your application will help you on the path to homeownership.
Here’s what mortgage lenders will look for if you carry substantial student debt. Avoid these pitfalls and follow this sound advice to put yourself in the best position to apply for a home loan while you still have a student loan balance.
How Student Loan Debt Affects Securing a Mortgage
When lenders review your mortgage application, their primary concern is ensuring that you’ll be able to repay whatever loan they give you. Like any mortgage loan applicant, your lender will review tax and income information to assess how much you can afford to pay each month. They’ll also consider your credit score and outstanding liabilities to determine your credit risk. When taken together, this information provides an accurate picture of how much you can afford to pay towards a monthly home mortgage payment.
Since the amount of student debt varies widely, it has different consequences for potential homeowners. Unfortunately, many people who hold student debt, particularly millennials, state that their student loan debt is the reason they are not able to buy a home.
For some, the monthly student loan payments are too large to allow them to save up for a sizable down payment. For others, the amount of debt-to-income (DTI) is of concern to lenders. With high loan balances from the loans used to obtain a degree, lenders worry that adding another massive liability to outstanding credit may be risky.
Student Loan Impact on Credit Scores
Student loans can have multiple impacts on your credit scores. Overall, they’re an essential indicator of your creditworthiness, so if you’re planning on getting a mortgage, pay attention to your score.
While high balances aren’t great for your credit score, consistently paying them down with on-time payments can build your credit history and boost your score. That shows that you’re consistent and responsible for your obligations. It follows, then, that you would also likely be good at making your monthly mortgage payments.
The opposite is true, too. The student loans by themselves won’t damage your credit beyond repair, but missing payments will significantly lower your credit score. To avoid this, make sure to pay your bills on time.
Student Loan Impact on Debt to Income Ratio
Lenders use the DTI metric to determine your credit risk by assessing your current and future income measured against your monthly payments. This ratio gives lenders a clear picture of how well they can anticipate you will be able to handle your monthly loan payment.
To calculate your DTI before applying for a mortgage, add up all of your recurring monthly debts. This figure includes credit card minimum payments, car loan payments, student loan payments, and any other debt payments that you make each month. Then, divide that total number by your gross monthly income, which is everything that you earn before taxes or other types of withholdings. To be qualified for a mortgage, lenders prefer that you have a DTI that is lower than 43%.
For example, consider a woman who makes a monthly student loan payment of $260 and pays $140 for a car loan. Taking on a $1600 monthly mortgage payment would require her to afford $2,000 in monthly expenses. If she earns $6,000 every month, her DTI (2000/6000) is 33%. Even though she makes a monthly student loan payment, she earns enough income to comfortably satisfy her obligations. They would be well below the lender’s standard 43% DTI requirement to secure a mortgage.
If another individual has those same obligations but only has $4,000 in monthly income, DTI rises to 50% with a $1600 mortgage payment. In this case, the person might struggle to satisfy all debt payments every month, and it will be challenging to get a mortgage for a house that costs that much. Read More..
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