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The number of college graduates with student loan debt is on the rise: about 40 percent of college graduates from the class of 2015 had student loans, up from 38 percent of graduates from the class of 2010. Many people wrongly believe that student loan debt is a minor concern. They assume that because college is free, the loan payments won’t be as high as those for a mortgage or car loan. They figure they can put off buying a house until they have paid off their loans, and that they won’t have to make any payments until they are retired.
Here’s a quick overview of how you can purchase a house with student loan debt.
Student loans currently represent over $1.7 trillion in debt in the United States. Every year, more and more students graduate with debt, and we see the effects of high student loan debt on personal and family life. Many people fear that they will not be able to get a mortgage because of their student loans. But even though it can sometimes take a long time, buying a home with student loan debt is very possible. In this article, we will discuss some of the main obstacles you will face along the way and how to overcome them. Here’s what you need to know if you’re buying a home for the first time with student debt.
Obstacles to home ownership with student loan debt
Student loan debt, especially high debt, affects the amount of money lenders will offer you to buy a home. Here are some factors that can influence a lender’s decision.
Debt to income ratio
Although they look at various factors, such as income and assets, the main characteristics that lenders look at are your credit history and score, as well as your debt, especially your debt-to-income ratio (DTI). What is the ratio of debt to income? This is a tool used by mortgage lenders to determine how much additional debt you can handle. It is calculated by looking at your monthly expenses, such as. B. credit card debt, student loans, car repayments and expected monthly mortgage payment, add this up and then divide that number by your gross income. To qualify for a qualified mortgage, your debt-to-income ratio must be 43% or less. Ideally, your DTI ratio should be below this value, i.e. below 36%. The higher your DTI, the more likely you are to pay a higher interest rate. Student loans are included in the calculation of the ITD.
Another factor that keeps many young people and families from buying a home is the cost of the down payment. Traditionally, a deposit of 20% of the total cost of the house is required. There are ways around this problem. However, with a smaller down payment, lenders often require you to have private mortgage insurance, at least until you have 20% equity in your home. Another thing to keep in mind if you make a smaller down payment is that you will pay more interest. A larger down payment means less debt, lower monthly payments and lower interest rates. Try to contribute 10% when you take out a conventional loan to get a better interest rate.
Other accommodation expenses
In addition to the down payment, there are other costs associated with buying a home. These costs may include closing costs, moving expenses, home inspection, lender fees, and title insurance. According to Zillow, closing costs are between 2 and 5 percent of the purchase price of a home.
If you have a lot of student debt, you may feel that most of your income goes to paying off loans, leaving no room for anything else. Adding mortgage debt to your existing debts, including student loans, can lead to long-term financial problems for you or your family. Student Loan Planner® offers counseling services to help you develop a personalized strategy to address your student debt and improve your overall financial situation. Our Student Loan Planner® advisors have helped more than 5,500 borrowers save more than $1.3 billion on their student debt. Get personalized help for your student loans
How do I get a mortgage with a student loan?
If you want to buy a house, even if you have student loans, it will be more difficult. However, there are steps you can take to buy a home despite your student loan debt.
Check your credit
Since lenders will look at your credit history and credit score, you should take the time to review your credit information ahead of time. There are many online services that offer free credit reports, such as. B. AnnualCreditReport.com. Next, you should strive for a better credit score. You can do this by avoiding late payments and reducing your credit usage. Try to use less than 30% of your available credit each month. A common mistake is to close old credit cards. The length of your credit history is an important factor in determining your credit score and what lenders are looking for. A longer story is always better. Closing old credit cards lowers the average age. So if they are traded in and there is no annual fee, leave them open. On the other hand, it is better not to open new lines of credit if you plan to buy a house in the near future.
Debt to income ratio reduction
You can lower your ITD by paying off debt, such as car loans and credit card payments. Be aware that mortgage lenders look at your monthly debt obligations, not the total amount of debt. Anything you can do to reduce your monthly debt will help improve your DTI score. Pay off the credit cards with the least debt first, so you can eliminate them from the books. You can also consider transferring your credit card balance to a card with a lower annual interest rate or a 0% introductory rate.
Even with the transfer fee, you reduce your monthly debt and pay a lower interest rate. Another option is to refinance long-term debt, such as. B. a car to reduce your monthly payments. If you are approaching the time when you are going to apply for a home loan, you should strive to live above your means. Address your debts aggressively and pay them off as soon as possible. Set aside every extra dollar to pay off your debts.
You can also look for a second job or create a side business to increase your gross monthly income. You can also reduce your monthly student loan repayments. Depending on your situation, refinancing or consolidating your student loan may be an option to get a lower monthly payment. Another option if you have federal student loans is to switch to an income-driven repayment plan.
Take advantage of new Fannie Mae guidelines
In 2017, there were changes to the way Fannie Mae handles student loans. These changes apply to individuals who repay their student loans under an income-based repayment plan. These are the new rules, according to Fannie Mae:
- If the borrower has an income-contingent payment plan, the lender may request student loan documents to verify that the actual monthly payment is $0. The lender can then authorize the borrower to make a $0 payment.
- For deferred loans or loans subject to a grace period, the lender may calculate
- A payment equal to 1% of the outstanding balance of the student loan (even if this amount is lower than the full payment actually made), or
- Fully repaid payment with documented repayment terms.
Prior to 2017, lenders were still required (not just for deferrals) to use 1% of the student loan balance to determine the buyer’s DTI, rather than the actual student loan payments. For example, if you have $90,000 in student loans, a monthly payment of $900 will be added to the DTI calculation even if your payment is actually $100 or less. This difference was sufficient to push the ITD of many borrowers above the level accepted by lenders. The new rules should make it easier for people with income-contingent repayment plans to get a mortgage.
Another change made by Fannie Mae concerns people whose student loans were taken out by a third party, such as an employer or parent. are paid. Fannie Mae now says these monthly debt payments should be factored into the borrower’s debt-to-income ratio. To qualify for this provision, you must provide the lender with written proof that the third party has made payments on your student loan for at least the past 12 months.
Consider flexible mortgage programs
State insured loans, such as Federal Housing Administration (FHA) and VA loans, can be good options if you want a loan with a higher DTI. Both loans have more lenient eligibility requirements than conventional loans, making them popular with first-time homebuyers. The FHA loan allows for a higher debt-to-income ratio, up to 57%. FHA lenders often require a much lower down payment (up to 3.5%) and a minimum credit score (up to 500).
These important aspects can make FHA loans a suitable option if you want to buy a home with student loan debt. In the meantime, VA loans can be a fantastic choice if you are a veteran or surviving spouse. With these credits, you can benefit from financing with an ITD of up to 60%. VA mortgages also do not require a down payment and borrowers do not have to pay private mortgage insurance (PMI). Finally, low-income students can take advantage of flexible conventional loans through the Fannie HomeReady or Freddie Mac Home Possible programs.
HomeReady has a maximum DTI of 50% and Home Possible has a marginal DTI of 45%. Both programs allow a maximum down payment of 3%. And these payments can be made from funds you have received through donations or installment assistance programs.
Buying a house at a lower price
If home ownership is your ultimate goal and you don’t want to wait any longer, it may be time to lower your standards. In other words: You should look for a cheaper house. This lowers mortgage payments, closing costs and down payment. Another option is to buy a renovated house that just needs a little more love and attention. This way you can buy a house in the price range that is ideal for you. And you can save money on upgrades and repairs in the future.
If you don’t choose a specific location, you can explore other cities in the area that may offer similar homes at lower prices. Try to stay away from expensive real estate markets if possible. Determine what equipment you need in your home and what can wait. Establish a price range that works for you and doesn’t put too much financial pressure on you, then look for homes that fit within your budget. The risk of not being able to pay your mortgage and risking foreclosure increases when you restrict your budget.
Do your homework
No matter how much student debt you have or what type of housing you are looking for, it is always a good idea to gather as much information as possible. Do your research. Look at your debts and your income. Determine how much you can afford to buy a house on top of your student debt. You don’t want to burden yourself and your family too much financially. Student loan debt is real and should be a priority in your plans. But this should not be an obstacle to having your own home. If you get your finances in order and make smart decisions, you can successfully buy a home with student loan debt. Take advantage of the new guidelines for lenders and borrowers.
Make a plan that works for you, then work towards it and buy the right house. Student Loan Planner® specializes in customized plans for borrowers with six-figure student loan debt to achieve your dream of homeownership. Click the button below to make an appointment with a student loan counselor. Get personalized help for your student loans Refinance your student loan and receive a bonus in 2021.
Frequently Asked Questions
Can you get a home loan with 100k in student loans?
Student loan debt is on the rise, and many people have found that the best way to pay off the debt is to use the student loan to buy a house. Unfortunately, not everyone can get a loan tied to a house, and some people have so much debt they don’t want to take out a student loan. We’ve all heard of people buying homes with no money down, but most cannot afford to do so. How to get approved for a home loan with large balances in student loans? Is it possible to qualify for a home loan with a student loan balance of $100,000 or more?
Is it smart to buy a house with student loan debt?
Have you ever been in this situation? You’re about to graduate, you have a week to find a new job, you want to buy a house, and you’ve been told you need to start saving for a down payment. But where do you start? The news just keeps getting worse. After the financial crisis, homeownership fell to its lowest level since 1963, a result of the mortgage crisis and its aftermath. Some people are fortunate enough to have been able to refinance their loans, but even these loans are now under a cloud.
Recently, a friend who had just taken a big loan to buy a house had called me saying that he was not sure if it was a good idea. I should have said yes. The problem was that I didn’t understand the Student Loan Debt I had taken on to buy the house. I knew that I should have been better at managing my student Loans, but I was just so excited to buy a house and to finally live in a place of my own.
How can I buy a house with high student loan debt?
If you are spending the majority of your income on student loans, you may be able to consolidate the debt and save thousands of dollars in interest. This is often referred to as “debt for cash” or “paying off your loans with your home equity”. This strategy is extremely popular with recent college graduates who are maxing out on their student loans. But everyone—young and old alike—can benefit from this strategy.
Buying a house can be a huge investment, but it doesn’t have to be at the expense of your future. Investing in your home is a means to an end – something that will provide you with comfort, security, and a place to call home. But you can’t afford that dream house if you’re buried in debt. But it’s never too late to turn things around – a few simple steps can help you achieve your goals and take control of your finances.