How Can I Buy a Home With Student Loan Debt? (Podcast)

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Buying a house with student debt? You’re not alone

Student loan debt can seem like a burden. But that doesn’t have to stop you from achieving your goals, especially buying a home.

As mortgage consultant Ivan Simental said in a recent episode of The Mortgage Reports Podcast, “You absolutely can buy a home with student loan debt.”

Are you hoping to buy a home but have student loan debt? Here is what to do.

Check your eligibility to buy a home with student debt. Start here (October 18, 2021)


Two Tips for Buying a Home with Student Loan Debt

Student debt can have a significant impact on your homeownership plans.

When you make large loan payments each month, that means you have less money left for a mortgage payment. And it can reduce your home buying budget.

If you’re worried about a student loan when buying a home, there are a few strategies that can really improve your chances of success:

  1. Reduce your debt to income ratio by paying off smaller loans and keeping card balances low
  2. Increase your credit score as much as possible to improve your borrowing power

In short, student loans can affect your housing budget, but they shouldn’t stop you from buying completely.

Talk to a mortgage lender about your loan options and find out how much home you can afford.

Check your eligibility to buy a home with student debt. Start here (October 18, 2021)

Strategy 1: Reduce your debt-to-income ratio

Your debt-to-income ratio (DTI) reflects how much of your monthly income goes to debt, and it plays a major role in any loan application.

According to Simental, the DTI is especially important when buying a home.

“We [mortgage lenders] want to make sure that you are 1) responsible and 2) that you can actually afford the payment, ”he said.

Typically, mortgage lenders will assume that your student loan payment is 0.5% to 1% of the total loan amount. They will then add this payment to any other debt payments you may have (car loans, credit cards, etc.) and measure it against your income. This lets them know what mortgage payment you can comfortably afford.

To make sure you have the best chance of qualifying for a mortgage, you’ll want to keep your debt-to-income ratio as low as possible. These five tips can help you:

Avoid credit card debt

You’ve probably received tons of credit card offers over the years – some may even come with serious perks, like free airline miles or interest-free periods. While it can be tempting, it’s important to avoid credit card debt as much as possible.

Not only does credit card debt increase your debt-to-income ratio, it can hurt your credit rating as well (and that impacts your mortgage application, too!)

“Don’t go into credit card debt,” Simental said. “Just say no. I promise you won’t regret this advice.

Pay off your other debts as much as possible

You probably can’t pay off your student loan debt right away. But if you can reduce some of your other smaller balances, it will help your debt-to-income ratio tremendously.

It could mean making an extra payment on your car loan, paying off your credit card, or spending an extra $ 100 on another loan or debt you may have.

Increase your income

Higher income will also lower your DTI ratio, so ask your boss for a raise, take a sideline, or increase your hours, if possible. If you can increase your take-home pay, it can help your mortgage application. In some cases, it can even help you qualify for a larger home loan.

Refinance or consolidate your student loans

Refinancing your student loans can help you get a better interest rate and lower monthly payment, which will also lower your debt-to-debt ratio. If you have multiple loans, you may want to consider consolidating or consolidating them into one loan. It can often reduce your payment as well.

Consider an income-based repayment plan

If you have federal student loans, you can sign up for what’s called an income-based repayment plan. These plans base your monthly payment on your salary – so if you don’t earn much, your payment will be incredibly low as a result. This not only makes it easier to manage your student loans, but also lowers your DTI.

Strategy 2: Increase Your Credit Score

In addition to your debt-to-income ratio, your credit rating will also play a huge role in your ability to qualify for a mortgage.

As Simental said, “If you have a lower FICO score then you are considered a riskier borrower. Lenders ask, “Why is your credit score low?” What did you do to make it low? ‘ “

The exact credit score you need to qualify will depend on your mortgage program. However, borrowers with a credit score of 740 or higher generally have the widest range of loan options and the best interest rates.

If your credit score is low, there are a few steps you can take to increase it. You can:

Reduce your credit usage

Your credit usage rate – the percentage of available credit that you actually use – is a big part of your FICO score.

For example, if you have a line of credit of $ 10,000 and a balance of $ 9,000, you are using 90% of your available credit. If your balance was only $ 1,000, you would have a 10% utilization rate.

Generally speaking, the lower your credit usage, the better your score. High usage rates tell lenders “that you are unable to properly manage your money,” Simental said.

Pay your bills on time

Payment history is another factor in your credit score – and late payments can take a toll on it.

“If you’re more than 30 days late, this is where it’s going to hurt,” Simental said. “And it’s very, very difficult to get rid of it. “

Late payments also show lenders that you are not responsible for your debts. After all, what is also keeping you from falling behind on your future mortgage?

To prevent late payments from hurting your chances of buying a home, consider setting up automatic payment on your accounts and utilities. This will ensure that your bills are paid on time, every time.

Keep your accounts open

It can be tempting to close a card or account after you’ve paid off the balance. But in the world of credit score, it can actually hurt you.

That’s because your credit history – or how long you’ve had an account – goes into your score. In fact, it represents 15%!

“If you’re going to pay off an account or if you’re going to keep your credit card at zero balance, make sure you don’t close it,” Simental said. “If you close it, you’re going to lose all the good credit history you have with that account. ”

Avoid new lines of credit

Finally, don’t take out new credit cards or new loans if you plan to buy a home in the near future. These only encourage you to spend more and add a credit check to your report. These lower your score and can hurt your chances of getting a mortgage.

Talk to a mortgage pro

Once you’ve prepared your credit score and reduced your debt-to-income ratio as much as possible, it’s time to speak to a mortgage advisor.

They can walk you through the home buying process, give you tips and tricks to improve your application, and help you choose the right loan product for your budget and goals.

Your loan officer will also help you get pre-approved for your mortgage, which is the first step in buying a home. Once you are pre-approved, you can start looking for your dream home.

Check your new rate (Oct 18, 2021)


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