The average student loan debt has risen to over $30,000, yet with graduation comes dreams of securing a great career and owning a nice home. There are millions of Millennials (those born in early 1980s into the early 2000s) who are eager to get their life after college started.
In a study by loanDepot, a top mortgage lender in the United States discovered more than one third of these Millennials have set their sights on obtaining a mortgage within the next five years. The big question is how are they going to accomplish this with their college student loan debt shadowing them?
Lenders will tell you the criteria to buy a home depends not only your credit, but your debt-to-income ratio and it is this which will make it difficult to qualify for a loan. They examine the monthly cost you pay to service your debt, not you total debt burden. The LoanDepot analysis showed that in order to qualify for a home mortgage, a person needs to reduce the monthly debt payments between $150 and $300. Even the smallest changes in the size of the applicant’s monthly debt payments can be enough to get a loan approved.
Let’s look at the 7 steps you can take to get closer to owning your first home:
1. Decrease your debt-to-income (DTI) ratio
As mentioned above, a mortgage lender will calculate your Debt-to-Income ratio to determine your ability to make monthly payments on the new mortgage. The current maximum threshold for an acceptable DTI is around 43%. The easiest way to improve your DTI ratio is to increase your income. Try to increase your monthly income for at least 6 months before trying to get pre-approved for a loan.
You can enroll Federal Student Loans into an Income Based Repayment Program which can drastically improve your DTI or try to get a lower monthly payment through refinancing and consolidation of your student loan debt.
2. Fix or improve your credit score (FICO)
Since mortgage lenders also weigh in your credit score, it is a good idea to print a report and get to work on fixing your credit, and finding a path to getting a better credit score. Higher credit scores are going to give you better interest rates. Do not look for quick fixes, like closing existing unused credit accounts, or quickly pay all you card balances to zero. This looks like a quick fix to lenders, and will negatively impair your credit. You do not really want to switch the way you use your credit. Just keep paying on time, which is the essential element of how your credit report is interpreted. Maintain healthy debt, if you have no credit but the student loan debt, this will not work in your favor. Don’t be labeled as a “thin file” when you apply for a mortgage. It is not recommended to open up any new credit lines except in this case. This should be done at least a year in advance of trying to get a home loan. Lenders have to see something substantial to show them that you will make good on your home loan payments. You might even want to look into consolidating your credit consumer debt into one lump payment a month. If you can find a card with a lower APR, put your most expensive accounts on it.
To find out what your credit score is, you can always request a FREE Annual Credit Report here. Make sure your credit report is accurate and up-to-date. Be sure to challenge any suspicious or time-related issues on your report.
3. Reduce your debt
Remember, we are looking at DTI ratio, credit history, and there are a couple of other areas we will cover later. If you are going to push for at least the maximum threshold of 43%, you have to be willing to be proactive in every corner of your financial life. Seeing into the future is difficult for some when it comes to planning and executing the plan or even staying committed during the down times. It can be done. So start early. The earlier the better and just keep that payment rhythm going. If you wait until the last minute, those are not going to be odds working in your favor. Find the extra income as said up above. This may be your golden ticket to the home loan.
4. Sacrifice your lifestyle
It is time to brush off the Starbucks, weekend movies, and any compulsory spending. Rent a cheaper house. This is another area creditors are going to examine thoroughly. How long have you lived at your residence? This shows stability. On a 2 year plan to purchase a home, compromise those standards and live as cheap as you can. This helps on the DTI ratio as well. When you get paid, take a bit from the side and open a savings account. Lenders look at this as someone who takes responsibility seriously. So next time you want to slack and get a pizza, remember if you use your head in a year or two you could be eating that pizza from your very own brand new digs.
5. Stay employed at your job
Lenders look at this seriously too. Even though the newer generations and wanting economy are pressing hard on trendy job-jumping, it looks bad to someone you want to get a loan from. Even if you hate your job, if you want that home mortgage, stay until the papers are signed. Be sure to include all those extra jobs you had to take to get that mortgage, this shows determination.
6. Get Pre-Approved so you know where you stand
This is an interesting adventure in learning about your financial picture. It is not nerve-wrecking or scary, but as said, interesting. If you already belong to a bank, go on in and talk to someone in home mortgages and have them look at your paperwork and application to assess your loan ability. You might even be in for a nice surprise.
There are a lot of people who look at their own credit report, debt, etc and think no one would ever loan to them. You might find out you only need to bring your credit score up by a few points, and they will explain how. This is a lesson we did not receive in grade school, which everyone could have benefited from. You will leave the bank with all the answers in your hands, and know the next step.
By getting pre-approved by a lender, you’ll learn what the costs and down payment requirements are. To determine what you can qualify for, a lender would look at your 2 year employment history, credit (FICO), income, and assets.
7. Check out all the homeowner’s programs available both federal and private
First-time home buyers have the advantage on most of these programs with minimal down payment requirements and expanded guidelines to include those who thought they couldn’t own a home. There really are a variety of available paths to getting your first home this way. In fact, if you are one to take on a challenge, you could even end up owning a farm. Whatever your story is, the biggest step to getting that home of your own is….to not give up!