Thinking about purchasing a home but worried you can’t afford it due to student loans? You aren’t alone. According to a study by American Student Assistance, “55 percent of student loan holders said their debt is causing them to put off homeownership.” Most of them believe their student debts would make purchasing a home impossible. The reality, however, is that owning a home is possible even with student debt. Here are some tips on how to purchase a home while still paying off student loans.
Don’t get carried away with temptation. Do your research within the housing market to find homes you can afford. You may have to wait a few years to purchase your dream home, but that doesn’t mean you can’t find a good starter home.
Lenders evaluate whether or not you qualify for a mortgage by reviewing your debt-to-income ratio. Your debt-to-income ratio is the percentage of monthly income spent on debt payments (loans, credit card payments, etc.). Mortgage lenders typically are looking for a debt-to-income ratio of 36 percent or less. Prior to applying for a mortgage loan, try to reduce your debt-to-income ratio by paying off as much debt as possible.
One way to reduce your debt-to-income ratio is to lower your monthly student loan payments. You can refinance your student loans or switch to an income-based repayment plan to lower your monthly student loan payments. There are downsides to both of these options, though. When you refinance federal student loans, they become private loans and you lose federal protections, including access to income-driven plans and federal forgiveness programs. Income-based repayment plans, which cap your monthly payment at a percentage of your income, increase the amount of interest you’ll pay over time because they extend your term length. Most lenders are more concerned about your total monthly payments than the increased student loan debt.
Your credit score is a strong indicator to mortgage lenders of your ability to handle debt. When lenders review your credit history, they want to see that you’ve paid your bills and debts off on time. One way to boost your credit score is to pay down credit card balances and keep them low. Another good way is to eliminate nuisance balances; in other words, gather up all of your credit cards with small balances and pay them off.
Purchasing a home not only involves taking out a mortgage loan, but closing costs and a down payment may also be required. A traditional down payment is 20 percent of the cost of the home, but there are other options, such as putting down less and paying for private mortgage insurance each month until you build 20 percent equity in your home. Remember, though, the less you put down, the more you’ll pay in interest.
Becoming a homeowner is possible even if you have student loans. Your financial advisor can help you determine the steps to take toward making your dreams of home-ownership a reality.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.