Don't Let Student Loans Stop Your Home Buying
A Plan for First-Time Home Buyers with Student Loan Debt
Study after study continues to reveal that millennials are citing student loan debt as a challenge to home buying. Nevertheless, millennials are currently the largest home buying population in the country, making up 38% of all buyers, according to the National Association of Realtors® (NAR) Home Buyers and Sellers Generational Trends Report.
If fewer millennials felt that student loan debt was holding them back, that number could grow even higher, considering millennials continue to demonstrate strong home ownership numbers as first-time home buyers. Reporting as of March 2020 shows that 86% percent of younger millennials/Gen Yers (buyers 22 to 29 years) and 52% of older millennials/Gen Yers (buyers 30 to 39 years) were first-time home buyers, more than other age groups, according to the NAR report.
Yet, so many of these dreamers feel held back by student loan debt. Fortunately, there are ways those dealing with student loan payments can buy a home.
Eliminating Student Debt from Your Debt-to-Income Ratio
When you apply for a home loan, lenders will look at something called your debt-to-income (DTI) ratio, among many other things, to determine whether you will be able to afford your monthly loan payments. Your DTI is the total amount of debt you owe compared to the amount of money you make, and student loan debt can raise that percentage.
Many lenders prefer working with borrowers who have a DTI 36% or lower. Depending on the qualification requirements of the loan program you applied for, there could potentially be a few ways to decrease your debt-to-income ratio:
- Apply for a graduated payment plan, which will cause your student loan payments to decrease for a certain period of time. After the graduated payment period ends, the payment will start to increase. A graduated plan could be especially helpful for someone who knows their income will rise substantially over the next few years. (Please note that this will not work for FHA loans, which require fully amortized payment to qualify the borrower.)
- Apply for a deferment. A deferment will cause a borrower's monthly payments to decrease for a set amount of time, and in some cases they may temporarily stop altogether.
- Consolidating all your student loans into one loan could potentially lower your overall student loan payment. Not only will this combine your student debt into one monthly student loan payment but may allow you to increase the repayment term from 10 years (which is typical for student loans) to 30. Keep in mind however, that a consolidation loan could transfer your account to a private lender, meaning you will no longer be eligible to apply for a deferment from the government or lose certain protections that come with having a student loan with the government.
Ways to Reduce Your DTI
In the past, if your student loan debt was deferred for at least one year, it would not be factored into your DTI when applying for an FHA loan. Currently, 2% of that debt is included in the calculation, potentially raising your DTI above the threshold to qualify for an FHA loan.
If an FHA loan is not for you and your student loan debt is destined to be a part of your DTI, there may still be some other measures you can take to reduce your overall percentage:
- You can focus on eliminating some of your other debt, like your credit card balances. In addition, if you have debt that will be completely repaid in 10 months or less, some lenders may be willing to remove it from your DTI calculations, so make sure to ask about that possibility.
- Design a budget and stick to it. Take some time to figure out how much debt you need to eliminate before you might be able to qualify for a manageable loan. Then make yourself a plausible budget that would allow you to start lowering your DTI and saving money. Sticking to a budget can be challenging, but it can be very rewarding with a goal like homeownership in mind.
Student loans can be a burden, but you don't have to let them stop you from achieving the dream of homeownership. New American Funding’s Loan Consultants can walk you through everything you will need to do to qualify for an affordable home loan.
If you're interested in checking out what a loan might cost you per month, New American Funding's mortgage calculator can help you determine the costs of different loans under different scenarios. Knowing approximately what you might pay per month can help you start to budget and save accordingly.