Many Millennials, college educated young people, want the American dream, their own home. But they have put off buying a house because of student loan debt. According to research, over 40% are not in the housing market because of that burden.
Contrary to what they think, having student loans doesn’t have to keep you from home ownership, it just requires finding the right way to take on the additional debt.
Here are the 4 steps to deciding how to handle buying a home when you owe student debt.
- Check your credit report – (There are many free services that will get one for you.) The most important factor lenders consider when deciding whether or not to lend you money is your credit score. Whatever your credit score might be now, you can improve it and get a good score even if you have student loan debt, as long as you haven’t missed payments.To boost your score BEFORE applying for a mortgage:
- Pay your bills on time, and in full and your score can soar
- Be careful with your credit! Whatever your total credit limit (credit cards, car loans, furniture, etc.) keep your use to 30% or less (E.g., total credit of $10,000 and amount you owe less than $3,000.)
- Don’t close old accounts, ones you don’t use, as long as you paid on time
- If you have wrong information or suspicious transactions listed on your credit report, you can ask the credit bureau to remove the information. (How to: https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports)
- Decrease your debt-to-income (DTI) ratio
The formula lenders typically use to decide whether you qualify for a home is that your monthly debt can be no more than 43-50% your income. New information on how to revise student loan debt so you can help reach that level is available from http://www.saltmoney.org/ (Salt®, is a free educational resource.)
You can reduce your DTI by paying down some of your debt or by increasing your income, with a second job, or odd jobs. You could enroll federal student loans into an income-based repayment program which can lower your monthly student loan payments to improve your monthly payment requirement.
- Work on getting pre-approval
Many lenders will either give you a pre-approval OR tell what specific things you have to do to qualify. Most lenders consider the last two years of employment history (verified by W-2’s), credit history, income, and assets. Self-employed people should expect an audit – so have a very good CPA.
Gifts from family are not unusual for first-time homebuyers, but they must be accompanied by a lender’s gift letter, and can’t be a loan.
- Find down payment assistance program
Check these out with state/city websites and make sure to find those that allow you to use sweat equity to help pay for a home.
- Don’t forget the government!
USDA – if you choose to buy in a more rural area, you might qualify for a loan, which requires no down payment
VA loans if you have served in the military
Research your options and speak with a knowledgeable mortgage broker to find out what programs you qualify for at a federal, state, and local level.
- Make SURE you’re ready to take on a new home
How comfortable you are with carrying two large debts over long periods of time?
Are you confident about your income – amount and stability?
How much are YOU willing to cut back on lifestyle in order to be able to make mortgage payments?
If you really want to buy a home, you can figure out anything, including loan debt.