Student Loans May Affect Mortgage Eligibility
For most of us purchasing a property is a major financial and life milestone. However, student loan debt student loans can make buying a home a challenge for some millennials.
According to a study published by the Wall Street Journal
, the average 2015 college graduate has $35,000 dollars in debt with a debt repayment plan that spreads over 10-30 years. As a potential home buyer, your mortgage application will be appraised based on three main factors: your current credit score, your down payment and your debt to income ratio.
1. Improve your credit score and check your credit report
One of the most important factors that mortgage lenders take into consideration when deciding if you qualify for a mortgage is your credit score.
As with most other loans, your student loan debt will drag down your credit score if you miss payments. Many times I have seen credit reports that show a student loan in repayment status, yet the borrower doesn't know so have missed payments on their record. TIP: MAKE PHONE CALLS ON ALL YOUR STUDENT LOANS & MAKE SURE YOU KNOW THE DUE DATE OF YOUR FIRST LOAN REPAYMENT.
Even more, if you pay your student loans in full and on time each and every time, your credit score will prove future lenders that you can handle money responsibly.
2. Reduce your debt-to-income (DTI) ratio
The DTI ratio is one of the factors that mortgage lenders take into consideration when deciding if a potential buyer can afford a mortgage payment.
There are two different debt-to-income ratios: front-end DTI and back-end DTI. Your front-end DTI is calculated by taking your estimated monthly mortgage payment and dividing that by your monthly gross income & shown as a percentage. The back-end DTI is all of your monthly payments + your new housing payment divided by your gross monthly income. When calculating DTI, the typical debts your lender considers are those that appear on credit + child support and or alimony payments. If you have payment arrangements with creditors such as the IRS for back taxes, then those will have to be included as well.
Mortgage lenders evaluate your DTI in order to get a better idea on how much debt a potential borrower can take on before starting to have financial difficulties.
Most mortgage lenders have set a back-end DTI ratio of 50% or even less. However, in some cases, they will approve mortgages with debt-to-income ratios up to 55% or even higher. While the standard benchmark for front-end DTI is 43 percent or less.
Student loans are not taken into consideration when calculating the front-end debt-to-income ratio, but that debt impacts the back-end DTI. Front-end is composed of the potential subject properties housing payment.
Before you go after a big financial goal, such as purchasing a house, calculate your debt to income ratio and try to improve it if it is too high.
- Postpone purchasing a new house until you have more savings for a larger down payment.
- Increase the amount you pay on your debts each month. This way you will be able to lower your overall debt more quickly.
- Stop taking on additional debt. The best way to reduce the overall debt is by reducing the amount charged on your credit cards.
As student loans can be included in a potential buyer's debt-to-income ratio or DTI they can prevent you from qualifying for a mortgage.
3. Consider down payment assistance programs
Down payment matters, because the size of your down payment determines for which mortgage loans you might be eligible.
Just a few people know that they could take advantage of one of the down payment assistance programs that are acceptable to lenders when purchasing a house. Most home-buyers consider that they are not eligible for a 30-year mortgage unless they have a 20 percent down payment. Although it is ideal to be able to pay a down payment of at least 20% in order to avoid paying for a Private Mortgage Insurance (PMI) you can qualify even if you have as little as 5% down payment on conventional loans and 3.5% on FHA loans. There are quite a few down payment assistance programs offered all over the United States.
If you plan to purchase a property in a rural area, you could even qualify for a USDA loan that requires no down payment. In case you have served in the military you should also consider the VA loans which also has ZERO down payment options.
Before applying for a second mortgage make sure you are able to carry two large debts over long periods of time. Carefully research your options and talk to your mortgage broker to get a better understanding of the programs you could qualify for at a federal, state, and local level.