According to data from the Institute for College Access & Success, 69% of students who graduated from public and nonprofit colleges in 2013 had student loan debt. On average, borrowers left school with nearly $30,000 of student loans to repay. That’s a huge burden for Millennials just entering the workforce and it’s no surprise many assume buying a home is out of reach.
Fortunately, it’s still possible to become a homeowner while repaying student loan debt if you think smart, prepare early, and consider all of your options.
Lenders calculate your debt-to-income ratio or DTI to make sure you can afford mortgage payments. Your DTI is the percent of your income that is used to repay debt each month including your mortgage, credit cards, student loans, or car loans.
A DTI below 36% is ideal and this is where graduates repaying debt can run into trouble. Your DTI may be higher than 36% when student loans are added to the mix. The good news is you can decrease your DTI to qualify for a mortgage before your student loans are paid in full.
First, downsize your lifestyle, so you can put more money toward paying off your other consumer debts. Stick to a budget and avoid making non-essential purchases. Don’t acquire any new debt, like a new car, until you’ve obtained your mortgage.
If you prefer not to change your lifestyle, you’ll need to earn more money. Take on a second job if necessary. A few hundred dollars of extra income each money can bring your DTI below the sweet spot.
If you have good to excellent credit and a decent salary, you may qualify to have your private and federal school loans consolidated and refinanced for a lower interest rate. A refinance can reduce your monthly payments and speed up your debt repayment process.
SoFi, Earnest, and Citizens Bank are three of the top lenders that offer refinances with low-interest rates and no application, origination, or prepayment fees. Before you apply for a refinance, shop around and weigh your options carefully.
An FHA loan is a viable option if you have trouble saving up a lump-sum while paying student loan debt. Unlike a conventional loan which requires a 20% down payment, an FHA loan only requires a 3.5% down payment.
Of course, there’s a catch. You do have to pay private mortgage insurance (PMI) which will increase your monthly payments. However, if you’re unable to put 20% down, the benefits of the FHA loan may outweigh the drawback of paying a little more each month.
Even if you’re approved for a mortgage, keep in mind owning a home comes with added financial responsibility and you don’t want to become house poor. Crunch the numbers to make sure you’ll have money leftover to maintain a comfortable standard of living after paying for your student loan, mortgage, utility bills, and any home maintenance costs that come up during the month.
Interested in learning more about your mortgage options or prequalifying for a home loan?