Student loan debt is a burden carried by approximately 43 million Americans[1]. As tuition costs increase, younger generations face a difficult road to homeownership, especially as interest rates continue to rise in the current real estate market. The dream of buying a home with student loan debt is vanishing.
In fact, 60% of millennials[2] who don’t own a home say student loans delay their ability to make an offer on a home. But it’s still possible to buy a house with student loan debt. Here’s how you can overcome the hurdle.
Student loans and mortgages
How do student loans affect your ability to buy a house?
You don’t have to be debt-free to qualify for a mortgage, but you do need to demonstrate financial stability.
Lenders analyze your debt and credit history to predict whether you’ll make your payments on time. They also want to feel confident that you’re making enough money to afford all your bills.
In the end, they don’t want to take on any risky borrowers, which is why student loan debt can often make it tough to qualify. Student loans negatively affect your ability to buy a house in the following ways:
- It’s more difficult to save money for a down payment.
- Late payments have a negative impact on your credit history.
- Student loans may increase your debt-to-income ratio to a level that’s too high
If you’re saddled with student loan debt, it can be more challenging to qualify for a loan, but it’s not impossible. Here are five tips to help you achieve buying a house with student loan debt.
1. Boost Your Credit Score
You consistently build and improve credit when you pay your bills on time. If you’ve done this without a problem for many years, you probably have a great credit score.
Every lender is different, but most require your credit score to be at least 620 to be approved for a loan. Additionally, you’ll need at least a 740 to qualify for the best rates.
If your credit score doesn’t meet this standard, it’s important to improve it before lenders pull your credit history. Set up automatic billing to ensure your bills are paid on time and pay off any debt you can.
If you have complex credit issues, including errors, look for a reliable credit repair company. Check online reviews to help you make the right choice.
2. Get Pre-Approved
Although house hunting is an exciting prospect, it’s important to know what you can afford before you begin. Pre-approval will help you determine a budget for your new house, which lays the groundwork for successful payments. It’s critical to buy a home that is comfortably within your budget, which includes your monthly student loan payments.
3. Improve your DTI ratio
Your debt-to-income ratio is an important factor when you apply for a mortgage.
Lenders look at your total amount of monthly debt payments and divide it by your monthly income. Using this, they determine whether you can afford your monthly mortgage payment after paying your other bills.
The ideal debt-to-income ratio will vary by lender and loan type. However, you generally want to spend no more than 36% of your gross monthly income on debt and no more than 28% on housing expenses.
4. Research Assistance Options
Traditionally, homebuyers put down 20% of a home’s purchase price, but there are several ways around this.
- Loans insured by the Federal Housing Administration allow first-time homebuyers to put down as little as 3.5%.
- Military members and veterans may be eligible for a Veterans Affairs loan that doesn’t require any down payment.
- Some states offer down payment assistance programs that specifically assist and incentivize first-time homebuyers with student loans.
There are also plenty of first-time homebuyer grants and loan programs that may help you achieve homeownership. Check for availability in your state by visiting the U.S. Department of Housing and Urban Development website.
When it comes time to make a purchase, a low-commission Realtor can also help you save thousands of dollars.
5. Partner With a Co-Borrower
Co-borrowing is a great way to leverage the credit profiles and incomes of two individuals. In addition to making the approval process easier, it can help you qualify for a higher loan and even lower your interest rate.
The key is to borrow with someone you trust who is in good financial standing. Consider a friend or family member who is reliable and eager to own a home and with a stable income.
