MORTGAGE MATTERS

3 min read

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Jun 2022

How To Buy a Home While Paying Student Loans

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WHAT YOU'LL LEARN

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Can you buy with student loans?

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Should you buy with student loans?

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The definition of DTI

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WHAT YOU'LL LEARN

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Can you buy with student loans?

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Should you buy with student loans?

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The definition of DTI

So, you’ve recently, or within the past few years, graduated from college. You have a steady job that pays well. You’ve budgeted your money to your exact liking, and you never miss your bills’ scheduled payment dates. Your credit is in good standing, so you decide to move out of your current apartment and into your first home. But then it hits you – you have student loan debt.

As you might expect, your student loans will affect the homebuying process, but they’re not a roadblock. And they shouldn’t be a deterrent. Instead, think of student loans as a hurdle to homeownership, something you can surpass, but it will take a little extra effort on your part.

Getting pre-approvalA validation of exactly how much of a loan for which you are approved.pre-approvalA validation of exactly how much of a loan for which you are approved. for a mortgage is not out of the question. Here’s why:

The Lender’s Perspective

First things first, you can have debts and still purchase a home. Granted, lenders will pay a great deal of attention to your debts, especially as to how they affect your income. They’ll determine what’s known as your debt-to-income (DTI) ratioThe percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk.debt-to-income (DTI) ratioThe percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk.. In short, your DTI informs lenders how much of your money goes toward paying debt each month and how much you have left over for your mortgage. A lower DTI means you’re “less of a risk” in the lender’s eyes.

Your student loans are spotlighted because they’re a lot like an audition for a mortgage. Both loans are huge commitments, so if you’ve steadily paid off your student loans, or even made extra payments, you’ll be viewed as a more appealing partner for lending.

But most importantly, lenders want to know you can handle a mortgage on top of your remaining student loan debts. A larger student loan debt could worry the lender, as there’s a greater chance you could miss a monthly mortgage payment.

With That Said, Can You Buy?

If you have a dependable income and lower DTI, homebuying is a possibility. If it’s feasible for you, consider lowering your DTI before applying for a mortgage by paying off your credit cards and student loans.

Expert Tip

If you have high-interest student loans, buying will be more difficult, so pay off those loans first before those with lower interest rates. We’ve exited the National Emergency Forbearance, so loans are collecting interest again.

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Additionally, you’ll want to save up money for your home’s down payment, closing costs, and inspection and appraisal fees. Read up on the upfront costs of homebuying in another of our Knowledge Center articles.

There’s a presumption that most loans demand at least 20% of your home’s cost for the down payment. While you can pay the 20%, certain Conventional loan programs require as little as 3% as a down payment, and FHA loans, common among first-time homebuyers, only call for a 3.5%.

As far as your credit score goes, consistently making payments to your student loans will help, but missing any payments can do some serious damage. If you’re fresh out of college, owning a home doesn’t have to be a long-term goal, but you don’t have to rush to buy either! Take your time, consider our tips, and make the best decision that fits your financial situation!

Good News from the FHA

Finally, if you decide to use an FHA loan to buy your home, you should know that as of June 2021, the agency lowered its requirements toward the student loan balance you carry and how much of it counts toward your overall debt.

The new guidelines state:

  • If your documented monthly payment is "above" zero, lenders can now use that payment amount in calculating your debt.

  • Or, if your payment is zero, lenders can now use 0.5% of the balance for a payment instead of the prior 1% of the balance.

This means better financing and more opportunities to buy the home of your dreams without student loans weighing you down.