4 Tips For Buying a Home With Student Debt

Twenty-somethings go through some major life changes after graduation. Student loans creep up quickly, and major expenses like phone bills and car payments come into play sooner rather than later. With all the financial commitments, it can be hard to wrap your head around how to tackle all these obligations while reaching any major life milestones. How can you move out, buy your own car and accomplish buying a home at the same time? Is it even possible?

Rest assured, buying a house with student debt is an attainable goal. 24% of home buyers in 2019 had debt due to higher education. That said, expect to put some hard work and dedication into being a homeowner. To finally purchase your first home despite student debt, there are a handful of details you need to take into consideration. If you’re an eager graduate ready to learn about steps to take toward becoming a new homeowner, here are some must-know tips.

1. Take A Look At Your Loans

To buy a home, you’ll need a clear picture of where you stand with student debt. Not only should you know the total amount, but you also need to take a look at your interest rate, as that will indicate the actual amount you’ll pay in the long run. The higher your interest rate, the more you’ll have to pay down the road and the longer your finances are tied up in other areas – ultimately delaying your home buying journey.

You don’t have to get rid of all your debt to become qualified to purchase a home. Still, you should hold yourself personally accountable to paying down your loans with the highest interest rates before considering this investment. The most important thing to consider is the income you’ll be relying on straight out of college, as that will determine how much additional debt you can take on. You can then speak with a financial advisor to take a deep dive into your balance sheet and decide if you’re in good financial standing to move out on your own.

2. Lay Out All Your Debts

Whether you’re 45 years old with a family of your own or a single 20-something recent grad, everyone has debt. After all, 45 million people in the U.S. alone have racked up $1.6 trillion in student loan debt, with the median monthly payment being $222. That said, mortgage lenders don’t rule you out because you have debt; however, they will closely examine the amount of debt you have compared to your net monthly income, otherwise known as your debt-to-income ratio (DTI).

Tally up your monthly fixed expenses, divide by the amount of money you bring in each month, and you’ll get this important percentage. If that percentage is less than 43%, you’re in good shape to become mortgage-approved. Anything higher might indicate you need to pay off a few loans before considering a mortgage. The less outstanding debt you have, the more eligible you are to take on a mortgage and make all payments reliably.

3. Understand Your Credit Score

Believe it or not, your credit health is directly related to your debt situation, as two of the major factors that make up your personal score are payment history (35%) and the amount of debt you have (30%). The more debt you pay off, the higher your credit score will be and the better your chances are of getting a home loan.

Lenders pay close attention to your credit score, but the minimum requirement can vary widely among different types of mortgages. For example, since FHA loans are government-backed, they require lower minimum credit scores (500-580 depending on down payments) and smaller down payments (3.5%), making them a practical home loan for first-time borrowers. On the other hand, the credit requirements for conventional loans typically start around 620.

You may not have the desired credit score to buy a home straight out of college, but don’t worry. Once you prove your reliability as a borrower by paying down some student loans, your credit score will gradually improve.

4. Consider Whether Or Not Homeownership Is Right For You

Homeownership is no walk in the park – at times it will drain you mentally, physically and financially. Unexpected expenses and repairs are destined to pop up out of thin air, calling for a little bit of elbow grease. Financially, if you don’t have a bulky emergency fund, you may find you’re in over your head and that renting is lower-risk and a smarter monetary decision. If your bank account is stacked, you have a steady income and the experts give you the go-ahead, then it could be time for you to take the leap of faith and explore your mortgage options.

Don’t be afraid to utilize each resource available to you. When “adulting” expenses become too much to handle, utilize a budgeting app to become more disciplined with your debts. When student loans become too overwhelming, talk to your loan servicer and learn about options like refinancing and loan consolidation. If you’re a newbie to homeownership or the buying process, talk to family, friends or a real estate agent to come to an educated decision. No matter your dilemma, be sure to seek guidance from an expert in the areas of home buying and finance, whether that means a REALTOR®️ or a financial advisor.

Home buying is a major commitment, and there’s no shame in carrying some hard-earned debt with you into the experience. Becoming educated and fiscally responsible means you can achieve some of life’s greatest milestones, regardless of your student debt.

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