Student loans can pose problems for many first-time home buyers trying to qualify for a home loan. This isn’t a news flash for most of us with student loan debt, but it also doesn’t have to mean the end of the road for the dream of homeownership.
There are several things that you can do to help ease the obstacles that having extra obligations can cause. We have an easy-to-use checklist to get you started, but here are some specific ways to get a game plan
to help you buy a house, even with the extra debt.
- Consider consolidating your loans and use the savings to save for a down payment. There are programs available that can consolidate student loans and credit cards that help lower the overall monthly payments.
- Pay your bills on time. This is the best way to keep your credit rating high, which helps you get the best rates (and thus the lowest payments) on other loans, such as for a car – or a mortgage.
- Keep credit card debt to a minimum. Having one or two major credit cards is OK if you pay the balances off every month. If you have to carry a balance, try to move those balances to your lowest rate cards.
- Don’t make big purchases or take out more loans if you’re getting ready to buy. This can directly affect your credit score and dash your hopes of buying a home. Remember that lenders do a recheck of your credit just before closing so it’s imperative that there are no new credit lines or loans that pop up at the last minute. Want a list of do’s and don’ts when you’re getting ready to buy? We have a great resource available.
- Pay off whatever you can before you start your home search. This can help raise your score – and also help with your overall debt-to-income ratio (which measure the percentage of your income being paid out to monthly obligations).
- Set – and keep – financial goals. Putting pen to paper and setting realistic, measurable goals can help you stay on track.
- Keep on top of your credit report. Most consumers report having errors on their report – which can likely affect the overall score. If you’re going to start the process of buying a home, check your report and work to make it as accurate as possible. This is also a great time to see where there are areas for improvement to raise your score.
- Take a holistic look at your budget. Make sure you can handle the monthly mortgage payment – regardless of what you “qualify” for. Does it fit within a comfortable space? Do you have easy ways to cut in other areas to accommodate a mortgage payment? Start making those cuts ahead of time to prepare your household for the new budget. You can use our payment calculator to help find the monthly payment that works for you.
- Put extra money towards your down payment fund. Income tax refunds, bonuses, gifts and overtime pay are “extra” and shouldn’t be pushed through your monthly budget. By putting those funds away, you’ll have more money to put down, or put towards closing costs.
Lenders will look at your overall financial picture, but typically consider student loan payments that exceed 8% of your income unmanageable. It’s difficult to calculate what that number is when applying for a loan in the beginning – and many students don’t pay close attention to what the payment will be when they have to start repaying their loans at some point in the future. It’s shocking how quickly the payments add up, so keep tabs on potential payment totals whenever you’re adding financial aid and student loans during the course of your education.
First and foremost, it’s best to have as little student loan debt as possible when you graduate. If you’re still in school, pay attention to how you’re spending your money and consider working part time to help limit the amount of financial assistance you’ll need. Spending money on tuition, room and board, textbooks and other school necessities is one thing… eating out, spending money on travel, or otherwise using money for unnecessary things is a quick way to graduate with more debt than you needed to.
This doesn’t mean you can’t do anything fun – this is college after all! Just be aware of your spending and don’t add to your balances unnecessarily. Student loans have 10 to 20-year terms, so those extras will be paid for over the long haul.
Want more information about how to qualify for a home loan? We’re here to help!