Tips on Home Buying with Student Loan Debt

How Do Student Loans Impact Your Finances?

Your credit score is one of several factors that lenders look at when evaluating your financial profile for a mortgage. It is determined by how much debt you owe, what kind of debt you have, and if you pay it on time- every time.

Student loan debt can affect your credit score positively or negatively. Missing or late payments to your student debt will lower your credit score. And these kinds of credit dings will remain on your credit report for several years. Making payments on time, however, can improve your credit score. Set up monthly auto payments for your student loans to boost your credit and give you peace of mind.

Calculate Your Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is simply one of the ways a lender gets an understanding of your financial situation and how comfortable you are taking on a mortgage to repay (in addition to any other debt you may have, including student loans, car loans, credit cards, your monthly mortgage or rent payment, and so on).

To calculate your DTI, add up your monthly debts and recurring expenses then divide the number by your gross monthly income (pre-tax). Then you have your debt-to-income ratio in the form of a percentage. Typically, lenders like to see a percentage close to 43%. The lower the DTI, the less risky you are in the eyes of a lender.

Tips to get your DTI down

Talk to your local lender about your financial profile and what sort of DTI they’re looking for. If your DTI is still too high but you’re itching to get on that homeownership game, there are ways!

The ultimate goal is to lower your DTI, so you’re going to want to reduce the amount of overall debt you have (or increase your monthly income). Paying off more than the minimum monthly payment is a good place to start chipping away at your student debt. Also, look into grants or scholarships that can help you pay off student loans.

Get serious about budgeting. If you want to save up to make larger payments on your student loans each month, you’ll need to pull the money from other places. Stick to a stricter budget and cut back on things like streaming services, limit weekly happy hours with friends or that fancy morning latte, and check your bank statements for monthly subscriptions that you may have forgotten about. These little things add up and you could have an extra couple hundred dollars each month!

Once you make a dent in your student debt (and any other large debts you may have), and lower your overall DTI, you’ll be ready to apply for a mortgage loan. Talk to a lender early in the process to develop a plan!

A larger down payment will help

If you can put down a larger down payment, that will reduce the overall amount of your mortgage, thus lowering your monthly payments. So if you have gift money, or can save up to put down more up front, you’re looking at more affordable homeownership.

At the end of the day, a lender is going to look at your financial profile to see if you’ll be able to pay a mortgage each month. Your overall picture includes your credit score, DTI, taxes, proof of income, and assets on a basic level. Will adding a mortgage payment to your existing financial profile be manageable, or put you over the edge? These are things to think about as you make a financial plan and look at mortgage options. So up your financial wellness and talk to a lender today!

Start Saving

We get it. When you have student loan debts and you’re juggling other expenses in life, saving money can seem stressful and out of reach. The good thing is any amount saved is better than none.

Pro Tip: Outline a monthly budget and stick to it. This way, you can get on the right track toward your homeownership dreams. We’ve rounded up a list of the best budgeting apps, including a variety so you can use one that aligns with you, your lifestyle, and your goals! Check them out to see which one is the best fit for you!

Calculate Your Desired Mortgage

While you’re researching mortgages and homeownership, it’s helpful if you know how much home you can afford. By working with a loan officer on getting pre-approved for a loan amount, you simplify your home search by focusing on houses within your budget. A pre-approval puts you in a stronger position to buy, narrows down your mortgage loan options, and gets you on the fast track to closing.

To get an idea of how much you’re comfortable spending on a mortgage payment each month, you can run the numbers on our mortgage calculator. If you’re ready to get in touch with one of our loan officers, apply now!

Identify the Costs of a Mortgage

At this point, you’ve likely landed on a number or tentative range that you feel comfortable spending each month on a mortgage payment (principal and interest). On top of repaying the loan amount monthly, there are additional costs of buying a home.

Additional costs include closing costs (typically 2-5% of the purchase price), the appraisal and home inspection (both typically range from $300-500 each), mortgage insurance (typically required if the down payment is less than 20%), and more. It’s also important to prepare for any home improvements, regular maintenance, and upkeep in and outside the home!

Increase Your Credit Score

Your credit score is a huge factor that lenders consider when qualifying you for a mortgage. While you can’t erase credit history, you can maintain your credit score, learn what causes your score to drop, and improve it if needed!

What causes a drop in credit score?

• Maxed out credit cards.
• Missed payments.
• Negative items on a credit report (bankruptcy, collections, etc.).
• Paying off a loan.
• Closing out credit card accounts.
• Credit inquiries (or credit pulls).

Ways to improve credit:

• Make payments on time each month.
• Pay more than the minimum amount due.
• Keep credit utilization (credit cards) below 30% of your available credit limit.
• Build credit from scratch by opening small lines of credit that can be paid off easily.
• Avoid large purchase when you’re planning to apply for a mortgage.
• Regularly monitor your credit.

The moral of the story is: Having debt (yes, even student loan debt) does not mean buying a home is impossible. After all, we’ve learned that having some debt is positive, as it can show lenders that you’re paying off borrowed money responsibly.

Everyone’s financial situation is different. If you’re ready to discuss your homeownership goals with a loan officer, walk through questions, or want to understand how you can get in the best position to apply for a mortgage, get in contact with one of our loan officers today!