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 can 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.
Having student loan debt also affects your debt-to-income ratio (DTI). DTI is another factor that lenders consider in your mortgage application. DTI is essentially the comparison of your monthly income to owed debts. You want to keep this balanced, so that your debts don’t completely outweigh how much money you’re bringing in each month.
To calculate your DTI, add up all of your recurring monthly debts (minimum credit card payments, car loan payments, and, student debt payments) and divide it by your gross monthly income.
Should You Pay Off Student Debt Before Applying For a Mortgage?
It doesn’t have to be one or the other. If owning a home is one of your top financial goals, there are ways to achieve that even while you're paying off loans from college or grad school. However, as mentioned above, your DTI can impact whether your mortgage application is approved, so you may want to try to reduce your DTI if you can.
Tips to Get Your DTI Down
First, find out what your DTI is, and ask potential lenders how that could affect your chances of being approved for a mortgage. You can contact Newrez and one of our mortgage experts will be happy to discuss your home loan options.
If you need to lower your DTI, you’re going to want to reduce the amount of overall debt you have (or increase your monthly income). If you can make more than the minimum monthly payment, that can be 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 most likely need to pull the money from other places, or figure out ways to make more money. 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. Small changes to your budget can add up quickly.
You could also take on a side hustle or extra hours at work, if either of those are an option for you.
You can also talk to lenders about your overall budget to see how much you can realistically afford.
A Larger Down Payment Can Help
If you can put down a larger down payment, that will reduce the overall amount of your mortgage, thus lowering your monthly principal and interest payments. So if you have gift money, or are in a position to put down more upfront, that could help you better fit the monthly cost of buying a home into your budget.
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. You can talk to one of Newrez's loan experts today to discuss your mortgage options, and what monthly payments might be manageable for you.
