The Federal Reserve Bank of New York discovered for the first time in a decade, households that carry a student loan debt are less likely to have a mortgage then those who do not. Real estate consultants anticipate at least an 8 percent drop in housing sales this year due to heavy college debt. If you have student loans and want to own a home, you will need to manage your debt-to-income ratio and overall credit score. This is the only way to secure a home mortgage.
Don’t count yourself out from buying a house just because you have accumulated a large amount of debt. If you have a debt-to-income ratio 45 percent or less can qualify for a mortgage. For example, a potential borrower who has a salary of $50,000 per year cannot have more than $1,875 in total debt to qualify. The amount of debt you owe will not be seen as important as paying your bills on time. It is easier to keep credit history clean, then to try and repair a lengthy poor credit report.
Lenders do look for some red flags, such as when borrowers have ultra-low payment plans that allow for monthly installments smaller than an amortized amount. They also suggest borrowers with a lower FICO score include a better picture of their financial history with perhaps letters of explanation, bank account statements, and rental payment history.
Mortgage lenders look at student loan debt similar to an auto loan, or a credit card. They want to see your ability to make your mortgage payments, and if you can save money in a rainy day fund. Credit unions will provide a more personal relationship, while banks are more lenient when it comes to approving mortgages for borrowers carrying a large amount of debt. People who have lower credit scores would be better to find mortgages at a small community bank that has their own portfolios of loans and can be more flexible.
Before you seek out a home mortgage, determine your credit score ahead of time. A credit score of 620 or lower is a challenge to secure a loan, but a credit score at or above a 740 is consider top tier. Also remember that mortgage lenders will want to know if you can manage other responsibilities which come with owning a home. This includes homeowners’ insurance, home maintenance and property taxes.
Ways to Improve Your Credit Score
Paying your student loans on time is an excellent way to build great credit. They do carry weight in mortgage approval as lenders look at your payment history. A lender will use your credit score not only for a loan approval but also to determine what your interest rate should be. Borrowers who have high credit scores are eligible for lower interest rates, as well as more loan choices. Federal student loans are typically reported as delinquent after 60 days of no payments, yet private loans may be listed as delinquent or even defaulted after only one missed payment.
If you have gotten behind in your student loan payments and you notice your credit score dropping, immediately contact your loan holder to discuss getting your payments back on track.
If you need to fix a default on a student loan or bring your account current from missed payments, opt for a different payment plan or temporarily postponing payment. You can also rehabilitate your loan and get it back to good standing. The delinquency will stay on your credit history, but the new reorganization will out shadow the past delinquency.
If you want to buy a home right after you graduate college, or if you are planning on taking on more student loans for college, stick to federal student loans and avoid private loans altogether. You will want the flexibility to lower your monthly payments so you can have a healthy debt-to-income ratio.
The bottom line is you can buy a house with student loan debt. By understanding the process involved, you can ward off potentially poor outcomes by being proactive with your credit history. The suggestions above will help you quickly identify key areas for improvements as well as what to expect in interactions with lenders. Knowing what the lenders will want from you to qualify a mortgage is another important area to focus on. Keep pushing forward with diligence; persevere right on into that new home.