Can I Buy a Home if I Have Student Loan Debt?

Millennials are facing a major problem with student loan debt. In 2018, 69% of college students graduated with an average student loan debt of $29,800,which includes both private and federal debt.

The amount of student loan debt has been steadily rising over the last decade. It is making it harder for first-time home buyers to get a mortgage. 

In previous generations, it was the norm to to settle down and buy a home after graduation. But, things have changed. Student loan debt is now the second highest consumer debt category, just behind mortgage debt and higher than both credit cards and auto loans.

According to National Association of Realtors, 80% of Millennials do not own a home, and 83% of those say they are holding off due to student debt.

Graduates with a high amount of student loan debt may end up finding themselves renting a home or an apartment, rather than buying a home. This is disheartening to those who want to settle down.

But becoming a homeowner is possible even if you have student loans! You just have to be aware of your options. It will be beneficial for you to improve your financial profile to show lenders you are a trustworthy borrower.

Here are some tips to consider when shopping for a new home while also paying off your student debts.

1. Look for Homes Within Your Budget

When shopping for a home, you’re going to fall in love with some properties that are out of your budget. It can be tempting to want a home with a balcony, a three-car garage or stainless steal appliances.

Before making any decisions, especially on a home that may be a little more pricey than you would like, do thorough research on how much you can truly afford. If you’re a first-time home buyer, you may have to settle for a starter home instead of your dream home.

However, looking into fixer-upper homes may be a great start. It will cost less, but you can always take out a renovation loan or fix some things up on your own to make it more homey.

2. Minimize Your Debt

When lenders evaluate you for a mortgage, they typically look at four things:

• Your income
• Your savings
• Your credit scores
• Your monthly debt-to-income ratio

The best way to lower your debt-to-income ratio is to:

• Pay off the balance
• Don’t skip any payments
• Make all payments on time

Lenders look for financially responsible borrowers when someone applies for a mortgage. They prefer to give loans to those with a debt-to-income ratio of 36% or less, including the monthly mortgage payment. To keep yours low, pay off as much debt as possible before applying for a mortgage.

3. Refinance Your Student Loans

Having a lot of student loans could give you a high debt-to-income ratio. To lower that ratio and show your mortgage lender you have enough money to afford your mortgage payments, consider refinancing your student loans or switching to a repayment plan to lower your monthly student loan payment.

In April 2017, Fannie Mae introduced three policies aimed at helping home ownership become more attainable for those with student loan debt.

The policies are:

• Student Loan Cash-Out Refinance: Offers the flexibility to pay off high-interest student debt while refinancing to a lower mortgage rate.
• Debt Paid by Others: Excludes from the borrower’s debt-to-income ratio non-mortgage debt paid by someone else.
• Student Debt Payment Calculation: Allows lenders to accept student loan payment information on credit reports, making it more likely for those with student loan debt to qualify for a mortgage.