Article Excerpt
Are you eligible for a mortgage with student debt? Let's take a look at some stats and how student debt affects your ability to become a homeowner.
The common consensus about buying a house with student debt - is that you can’t. But that’s really not always the case. Let’s look at some of the best ways to increase your chances of buying your first home, even with student debt.
Over two million people are currently paying down a student loan balance of more than $100,000. And $31B of student loan debt is overdue by ninety days or longer. So if you’re in one of these boats, you aren’t alone.
A 2018 survey conducted by Student Loan Hero shows that 69% students pay off their student loan debt in five years or less. 43% of those with student loan debt say that their decision to purchase a home was delayed because of their debt.
Mortgage Eligibility with Student Loan Debt
The first question is whether or not you’re eligible for a mortgage with your current debt. Student loan payments are counted in what mortgage lenders call your “debt-to-income” ratio, or DTI ratio. If your credit score is looking healthy, your DTI is low enough for your lender, and you have enough down payment ability for an FHA loan, then buying a house may be in the cards for you. So that’s the good news!
So what kinds of debts count toward your debt-to-income ratio? Here’s a few:
- Your future monthly mortgage payments
- Car loan payments
- Student loan payments
- Monthly credit card payments
- Any other personal loan payments
But how do you know how much your mortgage payments will be? The best way to get an accurate answer would be through an actual local mortgage adviser. But if you want to get an estimate on your own, try our mortgage calculator.
If you’re adding up your debts at this point and things are looking bleak - at least you’re aware of where you are now, and what your goal is! Student Loan Hero’s survey also finds that lots of student loan borrowers had to sacrifice vacations and dining out to get rid of their debt. When you make the difficult sacrifices now, it pays off in the long run. And knowing that there’s a light at the end of the tunnel (your very own house!) is encouraging.
Now, if you’ve messed up your credit score with some missed student loan payments, or your credit cards are maxed out, you’ll need to get that looking better first and foremost. Credit score, DTI, and down payment ability are all important factors in getting approved for a mortgage.
Example scenario
Let’s take an example based on average debt amounts in each major category listed in a DTI ratio.
In Texas, the average monthly car payment for a used car is $375. The average student loan payment comes in at $393 per month. The average monthly credit card bill for minimum payments is $123.
If your before-tax income is $4,000 and your monthly debts equate to these averages (with no other personal loans added in), you only have $789 left for your future mortgage payment until you approach a DTI that may pose some issues with mortgage approval. A higher DTI won’t always exclude you from getting approved for a mortgage, but lenders usually can’t bend much further.
The best place to start is by getting rid of just one of those payments altogether. Maybe your car payment is a good place to start. Without the car payment of $375, you’d have $1,164 left for monthly mortgage payments - which sounds way more reasonable for a house in Texas. Your ability to be approved for a mortgage could be a matter of eliminating other debts, like a car payment, even while you’re still paying off your student loans.
Chip away at student loan debt
So, where can you make cuts in your monthly budget? Reallocate some money into your car payment, student loans, or credit card debt. Lots of people paying off student debt go with the 50/30/20 rule: 50% of your income goes to true necessities (including debt!), 30% on entertainment and “want” items, and 20% to savings.
There are never penalties for making extra payments toward student debt.
Plus, you may have an opportunity to refinance your student loans into a shorter duration (to save on total interest paid), or even into a better interest rate if you have a good credit score and some steady income. It’s worth having a conversation with the organization that services your student loans about these options. With a lower interest rate, you’re able to make the same monthly payments, but get the debt paid off sooner.
Let’s see what you qualify for!
Even if being a homeowner isn’t in the cards for you right now, we’d still like to introduce ourselves. We can help answer any questions you have, and you can get a clear idea of what it’s going to take to own your own place. With time and diligence, it is realistic to become a homeowner with student debt.
Let’s get in touch. Get started with a few quick questions to see what you qualify for!
