Does it sound difficult to buy a dream home after having student loan debt? But in reality, it’s not, as there are a few relevant things that you need to take into consideration. Specifically, if you are dealing with this kind of situation where you have a student loan but want to buy a house. Moreover, this trend is more likely followed by students who are pursuing higher education. And usually, they don’t own homes; therefore, student loans became the major reason to opt for them. According to the information, student loan debt holds back potential homebuyers in two ways.
The primary one is about raising a prospective homebuyer’s debt-to-income ratio. Consequently, it makes it more difficult to secure a mortgage. The secondary one tells about facing difficulties in saving for a down payment. Furthermore, it has been seen that student loans can prove to be dragging or troublesome if you are planning to buy a house. Therefore, you can follow some tips and tricks to get rid of this. And these are working on your credit & DTI, choosing the right loan programs, and teaming up with the right partners.
Follow the Guide To Buy House After Having Student Loans
As per the rumors, opting for a Student Loan doesn’t automatically hinder you from buying a house. It might be possible that the processing can be challenging sometimes, but not impossible. Moreover, if you’re looking forward to buying your first house, but it’s getting harder due to the student loan debts? Then, you can follow this helpful guide to learn about the entire process:
First: Improve Your Debt-To-Income Ratio
Initially, lowering your debt-to-income(DTI) ratio can improve your chances of getting a mortgage loan. Your debt-to-income ratio works as an assurance of your loan repayment eligibility for the lender. Therefore, your DTI should be at most 28 percent, and your estimated mortgage and housing expense should be a maximum of 36 percent. Moreover, in order to bring more clarity regarding the same, follow the below points:
- First, you need to reduce balances by paying down your debts or working on whittling down your student loan debts. Plus, it would help if you reduced your credit card debts and other balances. And to make a dent, either use your holiday bonuses, tax refunds, or any extra funds.
- Next, you need to raise your income to improve your DTI, whether you are a salaried person or not. And to do so, ask for a salary hike, or add an additional part-time job.
- Ensure to lower your monthly payment and the interest that you need to pay over a loan repayment. And to do so, you can refinance or consolidate your student loans.
- Lastly, don’t forget to indulge yourself in an income-based repayment plan. As it allows you to reduce your monthly student loan payments to set with your current income level. Consequently, it will enable you to make payments 10 to 15% lower than your monthly income.
Second: Increase Your Credit Score
Another important thing is your credit score, which shows your loan borrowing eligibility to a lender. Therefore, it is important to maintain a higher credit score to get easy approval and a lower interest rate on your loan. In case you have a bad credit score, then you can improve it by following some tips:
- The first thing you need to keep in mind is to utilize your credit less, as the less you use it, the lower your credit utilization rate will be. Moreover, Credit utilization accounts for 30 percent of your total score. The easiest way to lower your rate is to pay down outstanding debts.
- Next, you need to keep in mind to pay your bills on time, as payment history carries another 35 percent of your credit score. You can even opt for autopay as a score resolution.
- You must know that 15% of your credit score depends upon the length of your credit history. And to tackle this problem, you must keep paid-off accounts open.
- Skip applying for new credit cards or loans, as it can cause hurdles while buying a home. Also, it has some hard credit inquiries that can have a negative impact on your credit score.
Third: Get Pre Approved For A Mortgage Before You Buy a House
Before you dig into the buying process of your dream home, it is essential to be preapproved for your mortgage loan. It can help you make an idea about a loan quantity and your eligibility while doing a home search into the budget. There are a few things that you need to remember while applying for pre-approval of a loan:
- Firstly, to get pre-approval, you need to provide different information. And these are regarding your debts, income, past residences, employment, credit checks, etc.
- Next, you need to know about the pros and cons of down payments.
- In the final step, the crucial documentation roles come to light. In this process, the lender will ask you to provide bank statements, recent pay stubs, W-2s, tax returns, and other financial paperwork.
Fourth: Consider Down Payment Assistance
There are a certain number of assistance programs that helps in covering both the down payment and closing costs on your loan. In case you are having difficulty saving up that down payment due to the student loans. Moreover, it is said that the assistance usually takes one of four forms:
- The first is a “Down Payment Grant” that is interest-free and denies repayment.
- The second on the list is “Forgivable Second Mortgages,” a loan used to finance your house. But it can be forgiven if you reside in the home for a certain number of years.
- The third is the “Traditional second mortgage” program, which assists you via a low-interest loan. Remember, this needs to pay off monthly, similarly to your primary mortgage.
- The fourth and last one is the “Matched savings programs.” It helps encourage you to save funds in a dedicated down payment savings account.
There are a few details that you must have to qualify for these programs. And these are:
- Initially, it would help if you were a first-time homebuyer.
- The secondary thing is that your income must be lower than a certain threshold.
- Another one is to complete a homebuyer education course.
- It would help if you were in any of these professions, such as military, veteran, or public servant.
- Lastly, you need to submit a certain level of savings monthly.
- The rest of the other things the agencies may ask you can be your credit score, other financial factors, and debt-to-income ratio. These are important to evaluate your application for assistance. Plus, it would help if you also informed me about the city you’re buying your home in and its median income.
Fifth: Find A Co-Borrower
When it comes to a “co-borrower,” you can opt for a reliable one, such as a fellow grad or a friend or family member. Things can work better if the “co-borrower” also wants to team up with you to buy a house that could benefit you both. Moreover, the work of the “co-borrower” is to apply for the mortgage loan jointly with you. Consequently, it benefits both you and the co-worker as it allows both your incomes and credit profiles.
So it will be easy for you to qualify for a higher loan balance or a lower interest rate. Another option is to pool your savings for a bigger down payment. Furthermore, while applying with a co-borrower, their debts and credit score also count toward your application. So, not having a strong financial position as your co-borrower would be helpful for you.
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