You’ve graduated from college, started your career, and now you’re thinking about buying a home of your own. But what if you’re still paying off your student debt? Here’s what you need to know about buying a house with student loans.
Down Payment And Cash Flow
The first and most obvious concern about taking out a mortgage when you’re still paying back your student loans is the strain on your finances. First, you’ll need to be able to save up enough to make a reasonable down payment – too little down will cost you bigtime in interest and fees over the course of the loan. When you’re making payments to Fannie Mae, Freddie Mac, or a private lender, it can be difficult to save up enough for a down payment.
By the same token, it might be difficult to make mortgage payments every month if you also have to make student loan payments. You’ll have to take a careful look at your budget to see if it’s doable.
The cash flow issues are obvious, but student loans can affect the homebuying process in another way – they may impact your eligibility to get a mortgage at all.
When you apply for a mortgage loan, your lender will look at every aspect of your finances to determine whether you’re likely to be able to keep up with payments. They’ll take into account your income, your savings, and any other debts you have. That includes student loan debt. They’ll compare your monthly income with your monthly debt payments, including the potential mortgage payment, to find your debt-to-income ratio.
In order to get a mortgage, you’ll typically need to have a debt-to-income ratio under 43%. For example, say you earn $4,000 per month after taxes and you have a $200 car payment, a $500 credit card payment, and a $300 student loan payment. Say you want to take out a mortgage with payments of $700 per month. That’s a total of $1,700 in debt, which puts your debt-to-income ratio at 42.5%.
With the average college graduate carrying almost $30,000 in debt and earning a median income of about $45,000, it’s tough to keep that ratio under 43%. After taxes, $45,000 works out to take-home pay of about $3,000. At that salary, monthly debt payments would need to be under $1,290 to qualify for a mortgage. Average student loan payments are about $250 per month, which means car, credit card, and mortgage payments would have to be around $1,000 total to stay under the debt-to-income ratio you need to qualify for a loan.
Buying A Home With Student Loans Through The FHA
For those who struggle to afford a down payment and make the standard debt-to-income ratio, an FHA loan can be a good alternative. However, even those loans are drawing out of reach for those who still have student loans. The FHA used to leave deferred student loan payments out of their calculations but have recently changed their rules to include a portion of the deferred debt. That also applies to those who have a monthly student loan payment of $0 under an income-based repayment program. Those who make monthly payments will have that monthly payment included in their debt-to-income ratio.
How Can You Buy A Home?
It’s bad enough to have student loan debt to deal with, but it’s even more frustrating that those loans can affect your ability to buy your own home. Unfortunately, there’s no good way to get out of your loans short of paying them off or having them forgiven by working as a teacher. So, you’ll just have to work with them when you’re trying to get a mortgage.
That means it’s the rest of your finances that will have to adjust when you’re buying a house with student loans. You’ll need to get your monthly debt payments as low as possible. You may want to pay off your credit cards completely or get a cheaper car. You may also consider taking on a second job to increase your income. Finally, look into your options for income-based student loan repayment. That can significantly decrease the amount you have to pay every month.
The mortgage process is complicated enough on its own; buying a house with student loans is even harder. If you’re struggling with a mortgage, we may be able to help. Contact us today for a free consultation to learn about your options.