If you’re interested in buying a home but carrying a heavy load of student loan debt, the statistics can be disheartening. As CNBC reports, roughly 45 million Americans are bearing the financial burden of student loan debt. When asked why they haven’t bought a house, more than 80 percent of adults between the ages of 22 and 35 who have student loan debt point the finger at their educational loans. And there’s evidence that they’re laying the blame in the right place. Studies link a 10-percent increase in educational debt to a one- to two-percent drop in the homeownership rate for those who carry it in the first five years after they leave school. Despite all this, don’t give up on your dream of homeownership. Buying a home with student loan debt is possible.
Buying a Home with Student Loan Debt
Student debt can put hurdles in your way as you travel the path to homeownership, but they don’t have to be insurmountable obstacles. Recognizing what challenges you’ll face and taking steps to overcome them can help you put your best foot forward and get approved for a mortgage.
Obstacle: A Low Credit Score
One of the factors lenders consider when deciding whether to approve a loan is the applicant’s credit score. Your student loans might actually help you by raising your score if you’ve been paying them off promptly. However, if you’ve missed payments, defaulted on your educational loans, or mismanaged credit while trying to make ends meet, the low credit score that you’ve gained as a result could make securing a mortgage difficult. Fortunately, there are several things that you can do to improve your credit score (source):
- Check your credit report for errors or inconsistencies. Request corrections if needed.
- Pay attention to your credit utilization. Use your credit wisely, and make it a point to have much more credit available than you regularly use.
- Don’t close old accounts. Dormant accounts still count when your credit score is being calculated, and closing them could negatively impact your credit utilization ratio.
- Pay your bills in full and on time. Lenders want to see that you routinely meet your obligations.
- Utilize various types of credit. Mix revolving accounts and installment debt to show lenders that you can handle credit responsibly.
Obstacle: A High Debt-to-Income Ratio
As its name suggests, a debt-to-income ratio is a reflection of how your debts, including student loan debt, compare to your income. According to Bankrate, lenders are often reluctant to approve borrowers whose back-end debt-to-income ratio is higher than 36 percent. While carrying student loan debt can leave you dealing with a high debt-to-income ratio, there are steps you can take to lower it. Start by refinancing or consolidate your educational loans. You might also wish to review income-based student loan repayment plans. What else can you do? Make an effort to pay down your other debts, and seek out ways to earn additional income.
Obstacle: Saving for a Down Payment
Even without the specter of student loan debt hanging over you, saving for a down payment can be tough. Fortunately, you may not need to save as much as you think you do. As NerdWallet indicates, a variety of loan programs require little or nothing in the way of a down payment. You may also be able to use down payment assistance programs to close the gap between what you have to put down and what your lender requires.
Are you wondering if buying a home with student loan debt is possible in your specific situation? Addressing the challenges that borrowers in your shoes typically face is a great start. What else can you do? Talk with a lender about getting preapproved for a mortgage. This will help you identify the strengths and weaknesses in your financial profile and give you a professional assessment of your true buying power. At PrimeLending Twin Cities, we want to help you achieve your housing goals. Contact us today to get started.