Buying A Home With Student Debt
Buying a house is a huge financial investment, but if you have student loan debt, as many Americans do, it could affect how much and what loan you qualify for. However, just because you have student loan debt doesn't mean you can't achieve your dreams of homeownership. Let's talk about buying a house when you're still paying back your student loans.
Check your credit score and improve it
One of the most important factors that your lender will consider when they decide what you qualify for is your credit score. FICO® is short for Fair Isaac Corporation, which is an independently operated company that pulls all the details of your credit history together into a number that reflects your credit score. The pieces of your credit score are payment history, outstanding balances, age of credit history, new lines of credit and inquiries, and types of credit.
Credit scores range from poor to exceptional, and what you qualify for will depend on where you fall in that range. You can pull your credit score once annually for free to see where you stand.
Your student loan debt may be impacting your credit score, but there are ways to maintain your score and potentially give it a boost if you need to. Be sure you:
Pay your bills on time. Paying on time and in full will help increase your credit score.
Use different kinds of credit, like credit cards, loans, etc. Doing this shows that you can handle the responsibly of different types of debt.
Manage how much credit you're using. You don't want to be using more than 30% of your available credit. For example, if you have $5,000 worth of credit lines and are using $2,000 of it, you are using 40% of your credit line. That may be a little too high, and your credit score may suffer.
Monitor your score and have errors corrected. It's important that you make sure there isn't any false information on your report, and have the credit bureau fix any incorrect information.
Decrease your DTI ratio
DTI stands for debt-to-income, and as is exactly what it sounds like: the ratio of your debts to your income. Debts can include anything from credit card debt to car payments and — you guessed it — student loans. To figure out your DTI, divide your total monthly debts by your household’s gross income, which is income before taxes. Multiply this number by 100, which gives you get a percentage. This is your DTI and the lower the percentage, the better.
Different loan programs have varying DTI requirements, so be sure to discuss DTI with your lender.
Although it may seem obvious, you can reduce your DTI by paying off some of your debts or increasing your income. Maybe you can use a bonus from work or tax returns to pay off some of your credit card debt or pay more on your car loan.
Look into down payment assistance and low down payment loans
If you're already making student loan payments every month, a down payment on a house might seem impossible. But it's not! There are a few different state and local down payment assistance programs that will significantly reduce your down payment. Talk to your lender about what's available in your area and if you qualify.
Additionally, there are low and no down payment loan options for borrowers who qualify. An FHA Loan offers a 3.5% down payment option, some conventional loan options offer down payments as low as 3%, and both VA Loans and USDA Loans offer no down payment options for eligible borrowers.
Consider a co borrower
Another option is adding a co-borrower to your loan. Having a co-borrower could help if you have student debt by allowing the lender to consider not only your finances, but also the finances of your co-borrower. A co-borrower's income, assets, and credit history are used in addition to the borrower's to qualify for the loan. This person could be someone close to you, like a spouse or a parent. It's important for both you and your co borrower to understand that you both have the financial responsibility of the full loan amount, and your co-borrower must be ready to make payments should you become unable to. Additionally, a co-borrower's name goes on the title, which means they have part ownership in the property. Before you let your student loan debt keep you from getting a home, look at your options, do your research, and be sure to speak with a mortgage lender should you need clarification or have any questions.