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It’s no secret that student loan debt is a major concern for many college graduates. The high expenses of college tuition add up and the loan takes a long time to pay off, especially if you just make the minimum monthly payments. Student loans become even more of a concern for first-time home buyers who are worried that their student loan debts may prevent them from qualifying for a mortgage.
Can I Buy a House if I Have a Student Loan?
Though student loans will impact your debt-to-income ratio (DTI), having them will not necessarily hinder your ability to qualify for a mortgage loan as a first-time home buyer. For most borrowers, there is still plenty of opportunity to buy a house while still paying off those pesky student loans. What you need to understand is how mortgage lenders look at all your debts—including student loans—and then plan your home purchase budget accordingly.
Understanding the Mortgage Approval Process
In some ways, student loans can actually be an indirect benefit for a potential home buyer. A college education goes a long way in the job market. As long as you have a steady income and can afford your mortgage payments (along with any debt payments), you should have no problem qualifying for a home loan with most lenders. If your student loans are on top of other major debts (car loans, credit cards, business loans, etc.), then you may encounter some more challenges with a mortgage. It’s all about your total DTI and several other important financial factors that mortgage loan underwriters will review carefully before approving you for a home loan.
Here’s How It Works:
First, you apply for a mortgage. It is highly recommended that you do this before you even start searching for a home. The goal is to get a pre-approval letter from a reputable lender. This will help you understand exactly how much you can afford (as in how big a loan for which you qualify). It will also make your purchase offers more attractive to home sellers, while also making the final loan approval process (after your offer has been accepted) go much smoother.
Debt-to-Income Ratio (DTI)
One of the key things the lender will review is your debt-to-income ratio. It indicates the percentage of your monthly income is required to pay your minimum debt payments. Student loans are among the debt payments calculated. The more you reduce your monthly debt obligations, the stronger your DTI will be. This gives you more buying power and makes you a more attractive borrowing candidate.
If you are able to pay down some of your debts before applying for a mortgage loan, it will surely help your situation. Student loan borrowers can also look into specific options that can reduce monthly payments. These include requesting a longer student loan repayment period or switching to a graduated payment plan. Or, you may focus your efforts on paying down other high-interest debts like credit cards. In most cases, your student loan(s) will not be as big a burden as some other debts you might have.
Other Financial Considerations
The lender will also review your employment history, income records for the past several years, credit rating (FICO score) and a number of other financial indicators to determine if you are a worthy mortgage loan candidate. Your DTI is just one piece of the puzzle, but it is very important.
First-Time Home Buyer Programs
Even if you don’t have an ideal debt-to-income ratio or a perfect credit score, there are many mortgage loan programs out there designed to help first-time home buyers. Examples include FHA Loans, USDA Loans, FannieMae HomeReady and VA Loans. You will want to talk with your lender to see which programs you might be eligible for, and which will give you the best ability to purchase your first home or condo.
In summary, your student loan(s) will affect your ability to qualify for a mortgage loan. They will be factored in as part of your total debt-to-income ratio (DTI). The better DTI you have, the more buying power you will have as a first-time home buyer. A borrower who is debt-free will have more options and be able to lock in better loan terms than someone who is saddled with a lot of debt. However, having debt like student loans will not prevent you from qualifying for a home loan. Each loan application is reviewed on a case-by-case basis and there are a lot of mortgage programs that can help you buy your first home—even with a relatively high DTI.
You should take the time to talk with a lender while also doing what you can to pay down major debts and improve your overall financial standing before diving head-first into a home search. Be prepared and your home purchase will be much more successful. If you are an Atlanta first-time home buyer, contact Moreira Team | MortgageRight to explore your mortgage loan options and get started with your loan pre-approval process.