Student Loan Debt | Financing Your New Home in the 21st Century
When buying the first home, your feelings of accomplishment and success can quickly turn into feelings of anxiety and stress.
Alongside student debt, first-time homebuyers are in the lower bracket of earnings and can often have a difficult time finding work. Likewise, your first home will cost more than ever before for first-time homeowners. Therefore, it’s crucial that you know how student debt will affect your odds for approval when considering mortgages. It’s also essential to see how you can increase your chances, and get your mortgage application approved.
Here’s some food for thought :
• When applying for a mortgage, lenders will always take your debt-to-income (DTI) ratio into consideration. This percentage is used to calculate how much of your monthly income will go towards paying off your debt. Moreover, yes, your student loan debt is factored into your monthly debt obligations.
• Minimizing your monthly payments is crucial because it has a positive effect on your DTI ratio. Curtailing your debt in this way is not hard to do. For one, you could switch over to a longer payment term. Alternatively, you could consider your options regarding advanced repayment. Finally, you could try to lower any other debts you carry to offset the impact of your monthly student loan payments.
• It’s important to remember that there are several mortgages specifically tailored to those with student debt. For instance, Fannie Mae’s HomeReady® Mortgage caters to households with low or moderate income, first-time homebuyers, those with limited down payment cash, and those with poor credit scores. Additionally, Federal Housing Administration, or FHA, loans are a good option for those with student loan debt as well.
Of course, there’s much more to buying your first home than meets the eye. This fact is especially when you have a significant amount of student debt.
So, let’s dive into the world of home financing alongside student debt. Together, we’ll answer some common questions surrounding the topic, and find out how to overcome this barrier to first-time homebuyers.
Does your student debt really matter when applying for a mortgage?
Many people think that student debt is separate from other liability when buying a home. However, this belief couldn’t be any further from the truth. As previously mentioned, your DTI ratio includes your student loan debt.
More specifically, your DTI ratio is the percentage which shows how much of your monthly income goes towards debt repayment. For instance, if you made $4000 a month and paid $2000 a month towards your dad, your DTI would be 50%. Now, although many peoples DTI ratio is not as high, it serves to remember that you need a DTI ratio of 43% or less to get mortgage approval.
That said, there is no rulebook stating that you need to pay this much of a percentage toward your debt every month. So, if this DTI ratio seems too rich for your blood— don’t worry! As long as your below this metric, you’re in good shape.
What else affects my chances for mortgage approval?
If you think that your debt-to-income ratio is the only thing that affects your odds of approval as a first-time homebuyer— you’re dead wrong!
Essentially, mortgages get approved based on three elements:
1. Debt-to-income (DTI) ratio
2. Down payment
3. Credit score
We’ve already pointed to the importance of your DTI ratio. However, the other two factors above regarding your approval odds are equally important. Not to mention, there are some lesser factors such as your citizenship or your employment history that may affect approval as well. Nevertheless, let’s look at the other two major factors that are most important when buying a home for the first time.
Down payments are essential because the amount of your down payment affects your mortgage loan eligibility. However, individual loans, like the VA mortgage and UDSA home loan permit 100% financing. In other words, if you use either of these programs, having a down payment doesn’t matter.
Be that as it may, if you don’t have a down payment, you won’t be eligible for more traditional home mortgages or an FHA. As it happens, a conventional mortgage’s required down payment is 3.5%, where an FHA will run you 3% down.
Your credit score makes a difference; there aren’t two ways around it. Every single mortgage program makes sure buyers meet at least some minimum requirement regarding their credit score. Almost needless to say, the minimum requirement of some programs is high, whereas the minimum requirement of others is low.
Your credit score is a significant factor for your eligibility.
Want some advice?
If you’re concerned about student loan affecting your ability, you probably need to call your lender(s). Work out a deal with them to lower your monthly payments so that you can lower your debt-to-income ratio. By reducing your DTI, you’re not only increasing your odds of approval for a mortgage, but you’re also mitigating the effects of your student loan debt on your overall credit.
Another way to manage your debt effectively and reach an acceptable level for mortgage eligibility is through loan consolidation. To put it differently, instead of keeping track of a handful of different student loans individually, lump them together with your credit cards and other debts.
By putting all of your debt obligations in one place, you’re lumping your principles together. So, you could effectively pay a single payment with a lower interest rate, as opposed to several different payments with varying interest rates.
You can also ask for an extension on your loan(s) term. For instance, if you initially signed an agreement for a student loan for ten years, you could extend this period to 12 or 15 years. Not only does this reduce your monthly payment amount, but it reduces your DTI ratio at the same time.
At the end of the day
Getting approved for a mortgage when you have student debt can be a trying process. Along with there being several mortgage companies with compatible programs for a variety of housing needs, many programs also allow for little to no down payment. Not to mention, hundred percent financing is available to those who qualify.
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