How Student Loan Debt Impacts Your Ability to Buy A House
06.28.2022 | Category: Homebuying
You've graduated with a solid GPA from a top college and you're on your way to starting your dream career. You have been offered a competitive salary, with a generous retirement plan and paid time off. You look at your increased income and start to wonder if homeownership is something you can look forward to in the near future.
That's when you open your mailbox and the dreaded letter you have not been looking forward to arrives. It's time to start making payments on your student loans. The amount due is enough to make you wonder if you'll be able to save for a house.
This is the reality for millions of Americans. According to the National Association of Realtors®, 60% of millennials who don’t own a home say student loan debt is delaying their ability to buy a home.
But do not fret. Many homeowners have student loan debt and despite it being a common challenge among would-be homebuyers, student loan debt does not always have to impact your potential to buy a house.
With a little bit of financial know-how and the right mortgage lender, student loans don't need to hinder your dreams of home ownership.
Learn how student loans impact your ability to be approved for a home mortgage loan and what you can do to avoid being denied for a home loan despite having student loan debt.
Determine how much you can save while paying your student loan
If you are hoping to buy a home in the near future, look at your overall budget, including your monthly student loan payment then look at how you can cut back on spending to save. Even if you can only save $100 a month toward a down payment, it’s still a step in the right direction.
If it appears that paying your student loan each month maxes out your budget, consider creative ways to manage your loan. Can you transfer the student debt to a 0% interest loan or can you make higher payments that pay off your loan faster?
Borrowers with solid credit may find that they are in a better position to negotiate lower pay-off amounts or lower interest rates. If you have good credit, you may also qualify for student loan refinancing. Consider these options for managing your student loans as you calculate how much you want to save for a down payment.
Understand how student loan debt impacts your creditworthiness
Student loan payments can often feel like an insurmountable burden to saving for a down payment on a house. And if your student loan is accruing high interest, paying the minimum due each month can also make it seem like you're never putting a dent toward the principal balance.
However, it's important to understand that missing student loan payments can result in late fees, missed payments penalties, and higher interest charges on your loan balance. Consistently paying student loans on time will strengthen your score while a missed payment or letting your loans default will hurt it.
In addition to payments impacting your credit score, the overall loan balance also impacts your credit worthiness. When assessing whether to approve you for a mortgage, lenders look at how much debt you have in relation to your pretax income. This is called your debt-to-income ratio, known as DTI, and it’s calculated based on monthly debt payments. Generally, the more debt you have — or the lower your income — the higher your DTI will be.
Research different programs available to help you manage your student loans
If your student loans are really hindering your ability to save for the down payment of a home, you may qualify for a number of programs enacted to help borrowers manage their student loan debt.
For example, if you were a student of a school that was accused of mishandling finances, you may be eligible for loan forgiveness by the federal government. You may also be automatically eligible for student loan forgiveness if you’re permanently disabled and receiving federal disability benefits.
Lastly, if you currently work for a US federal, state, local or tribal government or a non-profit organization including the US military you may qualify for student debt cancellation through the Public Service Loan Forgiveness (PSLF) program.
Finally, know that homeownership can still be in your future
If you don’t qualify for a federal loan forgiveness program, you may be eligible to pause payments. The U.S. Department of Education recently extended the student loan payment pause through August 31, 2022.
In addition to federal programs, state and local governments as well as some nonprofits also offer grants to help alleviate student debt. Employers are also starting to offer student tuition or loan forgiveness as part of their compensation packages in a quest to attract top talent.
Even if you don’t take advantage of these student loan programs, first time homeowners often need as little as 3% down to qualify for home mortgage loans such as FHA loans or VA loans. Even conventional loans don’t always require the recommended 20% down payment if you have top tier credit or low debt-to-income ratios.
You worked hard for your degree. Now it’s time for a home mortgage lender to work hard for you. If you’ve looked at your budget and decided student loans won’t stop you from your next goal of homeownership, contact a Mutual of Omaha Mortgage loan specialist to get preapproved for a home mortgage loan.