By Tracy Scott
Student loans made it possible for you to finish college. Federal grants and institutional scholarships weren’t enough to cover the costs of tuition, fees, books, and housing. This meant graduating college with your degree in hand, but also with a hefty amount of student loan debt. With the average student loan debt exceeding $32,000, many young adults are wondering if homeownership is in their future.
A recent National Association of Realtor’s study of student loan borrowers found that 83 percent felt student loans contributed to their reason for delaying homeownership. The inability to save for the required down payment was cited as the most significant contributing factor. But, does that mean student loan debt makes homeownership impossible?
Here’s what you should know if you plan to buy a home while still carrying a large student loan balance.
Reducing Your Debt to Income Ratio is Key
Your debt-to-income ratio (DTI) is the percentage of monthly debt you have compared to your gross monthly income. For example, a household with monthly debt payments totaling $3,000 and a gross monthly income of $8,000 represents a DTI of 37.5 percent. To be approved for a mortgage, a DTI of 36 percent or less is ideal. However, depending on the loan program, DTIs as high as 50 percent might be acceptable.
Also, some lender’s underwriting policies may require the DTI calculation to be based on the gross annual income in comparison to the total student loan balance.
How to Improve Your DTI
A DTI can be improved with some effort. Lower DTIs increase your cash flow and improve your chances for mortgage approval. Decrease your DTI by:
Pay off your small debts, e.g., credit cards, personal loans, auto loans, etc.
Boost your income by starting a side business or taking a second job.
Credit Scores Still Matter
Credit scores help lenders gauge the potential risk of lending money to borrowers. Scores typically range from 300 to 850. The three-digit score is a summary of your level of responsibility with credit. Your credit score can make homeownership possible or put it just out of reach. It influences your mortgage loan approval and your eligibility for certain loan programs and interest rates.
A credit score of 620 can open the doors for a conventional loan. Generally, higher credit scores mean lower down payment requirements and the best interest rates for borrowers. Some government loan programs are more flexible with credit scoring requirements. For example, with a credit score of 580 or higher, you may be eligible for a Federal Housing Administration (FHA) loan with only 3.5% down.
How to Improve Your Credit Score
Obtaining a copy of our credit history report is the first step to improving your credit score. Correct any inaccurate information by following the dispute policies for each credit reporting bureau: Equifax, Experian, and TransUnion. A free copy of each report is available by visiting AnnualCreditReport.com.
Data in your credit history report is what makes up your credit score. The formula used to calculate your score is unknown to the public, but two of the factors influence more than half of the score: paying your bills on time and credit utilization. Here’s what you can do about each one.
Pay your bills on time. You can’t change the past, but you can be intentional about your future. Avoid making late payments to your creditors.
Pay off all small debts and keep your credit accounts open. This will help your credit utilization ratio which is figured by comparing the debt owed to available credit.
Taking the above actions can improve your credit score and make buying a home with student loan debt easier.
The Forgotten Option That Makes Homeownership Possible
An option that potential homeowners often overlook is down payment assistance programs. These programs can cover all or part of your down payment if you qualify. The types of programs and eligibility requirements vary by location but are available in most areas across the United States. Don’t let your student loan debt stand between you and homeownership.
You have more home buying options than you might think. Let a Generations Home Loan Specialist walk you through applying for a mortgage. Our goal is to help you find one that’s the perfect fit for your budget and your financial goals. Get pre-qualified for a mortgage at www.MyGenFCU.org/Mortgage today!