4 Steps to buying a house with student debt

College graduation is here, you’ve just completed your bachelors degree and you’re looking forward to getting your diploma and starting your first big boy or big girl job in the next week or so. It feels like your life is finally coming together, you see light at the end of the independence tunnel, as you spend each night scrolling on Zillow dreaming of all the dinners you’ll burn in that awesome kitchen in your own home because you forgot to take home ec in high school. A few google searches later, you see countless articles saying there’s no way homeownership is possible with all the student loan debt you have, so the incoming question you have is, can you buy a home with student loan, the answer is yes, let me tell you why. 

Over just the past two decades, college tuition has increased at a faster rate than housing, medical devices and child care. In an investigation done by the College Board, the published tuition in 1999-2000 was $5,170, whereas the published tuition for 2019-2020 was $10,440. Before we jump into how you can purchase a home with student loan debt, don’t just think that a degree is a “golden ticket” to life without breaking down the cost-benefit calculation, and real understanding if the return is worth the price.

Understand that If your student loan payment is deferred to a future date or in forbearance then your credit report won’t have a minimum monthly payment on it, and since lenders can’t just throw a zero down for your monthly payment, they will typically take 1% of your outstanding student loan balance. It may not sound like a terrible thing especially if you have a low balance, but imagine a Dentist or someone in the medical field who has $300,000 in student debt, their monthly payment would be based on $3,000. 

Bryant Archway

If you’re someone who has a high loan balance, consider leasing below your means or living with someone you know to potentially get a discounted rent payment so you can allocate more funds to your debt. I know this isn’t the most stereotypical thing for a real estate professional to say, but financially speaking, living below your means in a home you don’t necessarily have to take care of would be a lot more beneficial for paying off your debt. 

At the end of the day, it’s about creating a better financial situation for yourself, and if you are stuck repairing your roof, buying salt for your water softener, replacing your water heater, or accidentally stumbling across the Joanna Gaines collection at Target, you most certainly won’t have any funds to be attacking that debt from every angle possible. 

Another way to achieve homeownership while having student debt is getting someone to cosign or co-borrow for you. Maybe you don’t have enough income to qualify for a mortgage loan, so a parent, close friend, guardian or significant other, with a satisfactory financial profile, can better your chances of getting approved for an exceptional mortgage. Of course, the co-signer needs to understand that they are taking on a risk of being liable for repayment if you fail to make your payments. I’d suggest staying on top of your payments so you don’t destroy that relationship of yours. 

Before I jump into the 4 steps of how to get a mortgage with student loan debt, I want to briefly talk about what lenders and underwriters are looking at as well as how your student loans are viewed by a lender.

Your debt, credit score, assets, income and any recent bank account transactions will be thoroughly reviewed and verified to ensure you can move along the home buying process seamlessly. It’s also important to note that you don’t need to be 100% debt free in order to buy a home. 

STEP 1: IMPROVE YOUR DEBT-TO-INCOME RATIO

That brings us into step one. You may hear time and time again from any prior research you’ve done about this topic, to improve and lower your debt-to-income ratio (or DTI). Your debt-to-income ratio is the percentage of your monthly income that goes toward debt. If your DTI is high, you will most certainly have a tough time getting a mortgage. In order to calculate this ratio, you’ll need to add up all your payments, such as your current mortgage payment or rent, insurance premiums, Homeowner association dues, minimum credit card payments, car payment, personal loan payment, child support and alimony payments, as well as your student loan payment.

It’s important to understand that you only need to include the minimum monthly payment required for your loans. Let’s say your total debt for the month is $2,000, you’ll want to divide that by your total gross income, in this example we will say it’s $8,000, the DTI ratio would be 25%. Most lenders would prefer a debt to income ratio of less than 46%, some government-backed mortgages may go as high as 56 or so percent, but if yours is higher, here’s a few ways to lower it:

For starters, try and increase your income. If you work 4-5 days a week, consider getting a part time job for the weekend so you can pay off some of your debt, look online to see some of the less demanding side gigs such as flipping items on eBay, craigslist, Facebook Marketplace, starting a one-person landscape company and beat the market prices, babysit some of the neighbor kids, or write a very thoughtful letter to that one rich uncle of yours. Whatever the job may be, just do something to be actively paying down your debt, especially if your current income isn’t cutting it. Solely having a student loan won’t be the deciding factor on whether or not you’ll get approved for a mortgage, it’s having a student loan and tacking on all your other debt such as: car payment, personal loan payment, credit card payment, etc. 

Consider refinancing or consolidating some of your loans. By doing this you could lower your monthly payment and the amount of interest you pay over the lifetime of the loan. Which will in turn free up some funds you can allocate to your debt. You can also consider the option of an income-driven repayment plan offered by The Department of Education for qualifying borrowers to lower payments to as little as 10% of your discretionary income. 

There’s a few options to choose from such as: Pay as you earn (PAYE), Income-based repayment (IBR), Revised pay as you earn (REPAYE) and Income-contingent repayment (ICR). Take your time to research these options to ensure you’re getting the best benefits possible. 

STEP 2: IMPROVE YOUR CREDIT SCORE

Step two is to improve your credit score, and check your credit report to get an idea of how much you need to do to get your credit score to the desired figure. As I have mentioned numerous times throughout my videos and podcast, a great way to boost your credit score is to of course pay your bills on time, don’t close any old accounts, and be sure to diversify your types of credit (for example, having a credit card, car payment and student loans). 

You’ll also want to focus on credit utilization as that is often blown out of proportion. Let’s say your credit line is $5,000, and your balance is $2,000, your credit utilization would be 40%, and the goal is to use as little credit as possible. It’s recommended to keep this percentage under 30%. 

STEP 3: GET YOUR DUCKS IN A ROW

Step three, after you begin getting all your ducks in a row, apply for mortgage pre approval and determine how much home buying power you have. A lender will not only need to see your credit history, income and assets, they will also look at your last two years of employment as well. Once you know how much home you can afford don’t forget step number four:

STEP 4: ASISTANCE PROGRAM AWARENESS

Seeing if there are any down payment assistance programs and first time home buyer programs that you qualify for based on your city and state. You can also take advantage of government-backed loans such as FHA, VA, and USDA. An FHA loan requires a 3.5%-5% down payment, a VA loan is for Veterans that requires no down payment, and a USDA loan requires no down payment as well. As awesome as the USDA option sounds, not all homes are eligible for this type of loan, so be sure to look up the USDA loan property eligibility map to see if you’re eligible!

Before I wrap this blog up, I want to cover a frequently asked question when it comes to student debt and homeownership, and that is, should you pay down your student loans before buying a house? If you’ve stuck around for the whole blog, you know there’s options for you out there if you are stuck with a little student debt. The most important aspect of your financial profile to keep in mind is your debt-to-income ratio. I briefly went over how to calculate your DTI, so feel free to calculate yours, and if it is 45-55%, start taking action immediately to lower that ratio.

Engrave what I am about to tell you in your mind and understand that there’s no rush to getting into your first home, I know it’s situational of course, but if you’re sitting on a lot of debt and you try to purchase a home without paying off a chunk of your debt, as well as creating an emergency fund, and saving a little bit of money for a down payment, you may find yourself stretching extremely thin, so be patient and don’t jump into it without a plan, because debt will follow you around forever, I promise.  

If you have any more questions regarding student debt or homeownership in general, feel free to reach out to me in the comments, Facebook, Instagram or by phone

Cheers,

Andrew McManamon is a licensed Real Estate Professional in the great state of Michigan. His philosophy to put people first has paved the way to his extraordinary real estate career. Born and raised in Brighton, MI, Andrew acquired a bachelors degree in business management and marketing from Cleary University in Howell, MI. The combination of his experience and education allows him to take a strategic approach towards every transaction and help his clients make more informed and confident decisions.

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