Buy a Home in Spite of Student Loans
If you’re like many millennials, you’ve got high student loan debts, causing you to feel discouraged about buying a home of your dreams. But don’t despair. According to StudentLoanHero.com, it’s possible for you to get a mortgage loan. It’s all in how you manage the three most important factors in getting loan approval.
Down Payment: Lenders feel better when borrowers can put some skin in the game, so they aren’t holding all the risk. Twenty percent of the purchase price of the home is the benchmark, but economic realities allow for much lower down payments to get a home loan. In most cases, a down payment of at least 3-3.5 percent will suffice if you have good credit otherwise. Down payments can be gifts from parents, from your own savings, or from state and local down payment assistance programs. You may be able to qualify for a no-down-payment loan for veterans from the VA.gov or a rural community loan from USDA.gov.
Credit Scores: Your credit scores are compiled by credit reporting agencies by using an algorithm that assigns values to your payment history, types of credit, and other factors. The higher your scores (300 to 850), the better your credit is allowing you to receive better interest rates and lower fees because you are a lower risk to lenders than others. According to Quickenloans.com, the minimum credit scores you need (between 580 and 620) depend on the type of loan you want. VA loans don’t require credit scores, but the private lenders who make the loans do have minimum credit score requirements, usually 580.
Debt-to-Income ratio: Debt-to-income (DTI) ratio means how much debt you have as a percentage of your income. Most lenders believe you should have no more than 28-31% of your gross monthly income put toward housing costs. Fortunately for you, student loan debt is considered more favorably than credit card debt. Your total debt service should be no more than 10-13% of your gross monthly income. To lower your debt, start making higher payments to reduce the amount of credit card debt you have. You can also refinance your student loans in some cases.
Should you refinance your student loans? That depends on whether you have federal student loans or private loans. Federal loans can only be refinanced by private lenders, which causes you to lose some benefits, such as interest-free forbearance during the pandemic, income-based repayment or loan forgiveness through federal programs. According to Nerdwallet.com, it’s a good idea to refinance if you can get a lower interest rate on a private loan, you have credit scores in the high 600s, and you have a DTI of less than 50%.
If you have a steady income, good credit scores and a little savings, and are buying an affordable home for your income, you should have little trouble getting a mortgage loan.