Recent college graduates receive heavy social pressures from friends or family about when their timeframe for purchasing their first home. However, they might discover that those same student loans that allowed them to finish their studies are now holding them back from purchasing their own home. The National Association of Realtors recently published that 83 percent of the non-homeowners state that student loan debt prevents them from buying a home.
Getting a Mortgage with Student Loans
In 2018, the average first-time homebuyer had $30,000 in student loan debt states the National Association of Realtors. But, if it is your only debt, this debt shouldn’t affect your ability to get a mortgage. What banks and other lenders are mainly concerned with is how much debt you have and your ability to repay your mortgage.
Like with any request for a loan, the lenders look at your debt-to-income ratio (DTI). If your debt far exceeds your income, you will be less likely to get the loan, whether it is a personal loan, vehicle, or mortgage. If you would like to calculate your DTI, get a copy of your credit report and add up all of your recurring monthly debt, this would be your credit card payments, car payments, and student loan payments. When you have your total debts, divide that number by your monthly income before taking out taxes. The resulting total should be a percentage. As a general rule, most lenders would be happy with a DTI of 40 percent or less to approve the loan, and some lenders want to see even less. Having a high DTI will prevent you from getting a home mortgage.
Ways to Reduce Your Student Loan Debt and drop your DTI
The fastest way to get a mortgage for that starter home is to reduce your debt load and decrease your DTI. Consider the following to help you get that starter home you have been wanting.
Cut Out Extra Spending – Spending more money than what you earn will result in more debt (obviously). Whether you get personal loans or rack up the credit card debt adding more debt to an already high DTI spells trouble. Leave your credit cards at home and develop an attack plan for reducing their balances.
Pay More Your Student Loan Balance – Create a plan to get rid of your student loans as fast as possible. A vital aspect of this plan would be to pay more towards the student loans’ principal balance. When you pay towards the principals, you cut the amount of interest you pay, sometimes cutting years off the loan’s life.
Make More Income – Sometimes, that entry-level position doesn’t pay all of your bills. If you add more income to your equation, it will immediately lower your DTI ratio because you have more money coming in. So, consider a part-time position for a short time to get your bills under control and your debt down.
Look for a Position that Provides the Benefit of Student Loan Repayment – More and more, we are seeing employers offer the employment benefit of student loan repayment. While you save up your down payment for your house, your employer could help pay down your student loans, thus, reducing your DTI and building savings.