Many people who take out student loans wonder if they will ever be able to own their own home. The good news is that it is possible to buy a house while you have student loan debt. However, there are a few things you need to know before you start the process. First, you will need to get pre-approved for a mortgage. This will give you an idea of how much home you can afford. Then, you will need to compare your monthly student loan payments to your potential mortgage payment. If your student loan payments are relatively low, you may be able to qualify for a home improvement loan. This type of loan can be used to cover the cost of improvements, repairs, or closing costs. With a home improvement loan, you can make your dream of homeownership a reality.
Here are some other ways to buy a house when you have student loan debt.
Step 1: Lower Your DTI
Your Debt-to-Income (DTI) ratio is one of the strongest metrics mortgage lenders used to determine your eligibility for a loan. To find out what your DTI is, tally your total monthly debt payments and divide that number by your gross monthly income. Anything higher than 36% will most likely result in your mortgage application getting denied.
Even if your DTI is under 36%, the lower you can make it, the better. The easiest way to do this is by consolidating your debt so that you can get your student loans and credit card debt knocked out faster. There are many online personal loans out there designed specifically for this so research which options are the best for your credit score and financial goals.
Step 2: Check out first-time homebuyer programs
The federal government has dozens of programs available to help first-time homebuyers secure a mortgage. The FHA, USDA, HUD, and VA all have programs designed to help potential homeowners like you and mortgage assistance programs by Fannie Mae and Freddie Mac can significantly reduce your down payment and improve your chance to be approved for a federally-backed mortgage
Step 3: Keep an eye on your credit score
Mortgage lenders are very familiar with the reality that most of their mortgage applicants also have student loans so they will rarely reject an application solely because of student loan debt. However, having outstanding student loans means that your credit report will be scrutinized to see how well you’re managing this current debt and if adding another loan makes your debt burden unmanageable.
To ensure you are seen as an eligible borrower who can get a competitive rate on your mortgage you’ll need to have as clean a credit report as possible. Before applying work on getting your credit score to at least 640 to be seen as eligible for both mortgages and federal home buying assistance programs. Scores of 700 – 739 will get you better interest rates while scores of 740+ will receive the lowest and most competitive offers.
Step 4: Research ways to lower your student loan obligations
Lastly, consider finding ways to lower your student loan obligations either by reducing your number of lenders or decreasing your monthly payments. Federal loans can have their monthly payments drastically reduced through income-driven repayment plans. For private loans, consolidating your student loan debt can help reduce both your interest rate and the number of lenders you’ll need to pay, making it easier to take on a mortgage.
The bottom line
You can be approved for a mortgage when you still have outstanding student loans, but it will require you to do some work ahead of time to improve your eligibility. The more intentional you are with your finances, the better off you’ll be during the mortgage application process. Use this guide to help create your path toward becoming a homeowner soon and stay on top of your financial health.