Student Loans And Buying A House
There are a few different ways your student loans affect your finances, including your debt-to-income ratio, savings potential and credit score. All of these could contribute to your ability to buy a house.
student loans and buying a house
Buying a house requires an upfront down payment, usually totaling multiple thousands of dollars. If you have student loan payments, you may find it difficult to save for a down payment on top of your monthly student loan bills, which can easily delay your ability to buy a house.
Payment history is the most crucial factor in your credit score, accounting for 35 percent of the total score. Borrowers with an on-time track record will see their score increase, while those who have made late payments on their student loans will see a reduced score. Consumers who have loans in default will also see a dip in their scores.
With all this being said, it could make sense to pay off student loans before you buy a home in certain scenarios. If you can pay off student loans in one year or less and just want them out of your life, for example, you might want to stay the course and wipe them out as fast as possible. The same is true if student loan payments take up a significant portion of your monthly budget and a mortgage payment would add undue hardship.
Should you pay off loans before buying a house? How student loans impact your credit score Mortgage approval with student debt Debt-to-income ratio 5 steps for buying a house with $100K in student loans
In 2017, Fannie Mae changed how it looks at student loan debt. If your loans are deferred or in forbearance, you can qualify by paying just 1% of your total balance. Borrowers who are on an income-driven repayment plan can also use their actual monthly payments to qualify for a mortgage.
If you have large student loan debts and a lower credit score, an FHA loan may be the best option. Backed by the Federal Housing Administration, FHA loans allow for a down payment of just 3.5% with a credit score of 580 or higher. And FHA lenders can approve DTIs of up to 45% or even 50% on a case-by-case basis.
Keep in mind that FHA typically charges mortgage insurance premiums (MIP) until you refinance to a different type of loan or pay off your house. Because of this, conventional loans are often cheaper for home buyers who can qualify based on their credit scores.
Luckily, mortgage lenders are aware of this. And many offer special home loan programs for these types of professions. Certain loans can be extra lenient about your student debt repayment plan or your employment history. And they might offer additional perks like reduced upfront fees. For more information, see:
Fannie Mae says that for conventional loans, lenders can use a $0 student loan payment for borrowers who document that their payment actually is $0 under an income-driven repayment plan. Again, you have to find a lender willing to go through the extra steps and document your $0 payment correctly.
The first step is to determine your debt-to-income ratio, factoring in student loans and any other debts you pay monthly. You can see a full list of debts that are and are not included in your ratio here.
FHA loans also have guidelines regarding student loans and DTI ratio. As is the case with a conventional loan, your student loans will be considered in your debt obligations, and your lender will derive the monthly payment amount from your credit report or student loan statement.
Knowing how your student loans can impact your mortgage options is important, but keep in mind your DTI ratio is just one element in the underwriting process, and there are often compensating factors, such as credit score, that lenders use to determine if you qualify for a loan.
Potential home buyers often wonder whether they should pay off their student loans or buy a house. There is no right answer here, especially because the amount of debt you have, how quickly you can pay it off, and the type of home you want to qualify for all impact this decision.
If you have deferred student loans - which means that you are back in school, in the military, or can demonstrate economic hardship (federal student loans were also deferred for 2020/21 due to COVID) - you may be wondering how this impacts your ability to buy a home.
Given that the relief will be $10,000 for government-backed loans and $20,000 for Pell Grant recipients making less than $125,000 per year, the move seems most impactful for potential homebuyers where student loan debt of less than $20,000 was the barrier to purchasing a home.
It feels especially bad when he compares himself with his father's generation. Neither his father nor his uncles were burdened by student loans. "They all owned a house and had their full-time jobs by the time they were like 21," McHale says.
Your student loans are part of your debt-to-income (DTI) ratio. Lenders do look at your DTI as one of the factors in qualifying for a loan. If you have a hefty amount of student debt, taking on additional debt, even in the form of a mortgage, could put you are risk for defaulting on either loan.
It isn't advisable to use student loan money for anything other than your educational expenses. If you are reported to the U.S. Department of Education, you could be ordered to repay your student loans immediately. And lenders will ask you to document your financial records, i.e., an influx of cash from a student loan will probably be examined by the underwriters.
Interest rates on student debt vary, too. Rates on federally backed debt for undergraduate degrees are the lowest, and range from 2.75% to 4.66%, depending on what year you took them out. Graduate school debt carries interest between 5.3% and 6.6%, and PLUS loans can run as high as 7.6%. Private loan interest rates are generally higher, ranging from 3.34% to 12.99%.
After six months of owning your home, Fannie Mae also provides guidelines for lenders to allow you to use your mortgage to pay student loans. The option is a student loan cash-out refinance. Similar to a regular cash-out refi, if your home has increased in value and you meet their requirements, you can refinance your mortgage for a larger loan. You can choose a new lender or the same one, if possible. The lender takes the difference between this new loan and your current loan, transforms it into cash, and directly applies it to your student loans.
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
If nothing works, delay your home goal a couple years as you get your student loans and other debt in order. This time might be used to bank away money for your down payment, seek a higher paying job, or reduce other kinds of debt that may be holding you back.
If you attended college in the United States, you may have significant student loan debt one in every five American adults, or 44.7 million Americans, owe money on student loans. A recent Credible study found that the average student loan debt in the United States is $33,654, with over 2.8 million borrowers owing $100,000 or more.
So, what does this mean for the average home buyer with $100k+ in student loan debt? Buying a home with student loan debt is still possible. Even significant student loan debts do not have to prevent you from becoming a homeowner if you are okay bearing two long-term loans at the same time.
Student loans are the most common type of debt carried by first-time house buyers. However, compared to other forms of borrowing, such as credit cards, they might disproportionately influence your mortgage budget.
Similarly, if your student loan payment prevents you from making retirement contributions, you might consider putting off buying a home until you have paid off more of your debt. Remember that most mortgages need a down payment when purchasing a house. You should have this saved as well.
Finally, consider your current interest rate. If you have a high-interest rate on your student loans, they will cost you more money. Paying down more of your higher-interest loans before investing in a property allows you to minimize the amount of interest you pay.
Mortgage lenders consider your credit score substantially when calculating your approval prospects and interest rate. If you've had difficulties making timely payments on your student loans, your chances of qualifying for a mortgage may suffer.
While buying a home with student loans may be more complex, it is not impossible. If you're wondering how to secure a mortgage with student loan debt, follow these five suggestions to increase your chances of approval.
If you have numerous types of debt, such as credit card balances, vehicle loans, and student loans, strive to pay off the account with the lowest balance first. Paying down an account reduces your monthly payment obligations and improves your DTI ratio.
If you have private student loans, you can minimize your payments by refinancing them. When you refinance your debt, you may get a lower interest rate, a longer payback term, and a lower monthly payment.
Buying a house with unpaid student loans is a big commitment, so before you start house hunting and comparing mortgage rates, take the time to examine your current situation and how it could change in the future.
Excellent credit is required for the best mortgage rates. However, if your credit score is less than 740, it doesn't mean you should postpone your home purchase. On the other hand, if your credit score will suffer due to neglecting your student loan debt in favor of your mortgage, you should consider deferring your house purchase for the time being.
Individuals will have unpredictable sources of income in some industries. Salaries in commission-based sectors are frequently variable. You must have a consistent income stream before paying off student loans to acquire a home. Many mortgage loans and lenders will also need this as a condition for approval. 041b061a72