Student loan debt has a way of making you feel trapped, especially when it comes to accomplishing major milestones like buying your first home.
Truth be told, having such a heavy financial burden does make you think twice before putting all your money into yet another big-ticket item.
While it’s good to be cautious while dealing with debt, this doesn’t mean you should stop yourself from living the life you want, in the place you want. Seriously consider becoming a homeowner? Here’s how you can buy your first home, even if you have student debt.
Work On Your Debt-To-Income Ratio
When it comes to buying a house, your debt-to-income ratio (or DTI) is one of the most important factors for both you and your lender to consider because it shows your ability to comfortably pay your bills every month while also tackling any debt you may have—student loans included.
The general rule of thumb is that 28% or lower is the ideal DTI range when only considering your current debts and income; 36% being the maximum after you factor in mortgage and housing expenses. If your debt-to-income ratio exceeds what your lender has deemed acceptable, then it’s time to think about how you can chip away at your existing debt and increase your income, singly or simultaneously.
If you’re unsure of how to figure out your debt-to-income ratio, here’s an easy-to-use calculator to help you get started.
Improve Your Credit Score
Simply put, a higher credit score improves your chances of getting approved for a mortgage loan and keeps your interest rate on the low side. Lenders want to make sure that you don’t carry high-risk as a borrower, and low credit scores tend to be an indication that you can’t pay bills consistently or even on time.
Some ways to improve your credit score are:
- Pay your bills and debts. Staying true to your loan payment plans, paying bills on time, and settling collections debt are the keys to significantly raising your credit score in a short period of time.
- Keep the balances on your credit cards and other revolving credit accounts low.
- Avoid big ticket leasing and applying for new credit cards months before you apply for a mortgage loans.
- 15% of your credit score is impacted by the length of your credit history, so it’s a good idea to keep accounts for unused credit cards open to show that you are capable of keeping accounts in good standing for the long-term.
Plan Your Budget Around Mortgage Pre-approval
Mortgage pre-approval is when your lender determines how much money you can borrow, what you’d be paying every month, and what your interest rate will be, based on your income, debt, assets, and credit history. While being pre-approved doesn’t mean you’ll automatically get a loan, it does give you a great idea of what your bills would look like after you take on this new expense.
Knowing how much you’ll be able to borrow before you start looking for a home is actually a pretty big advantage because it allows you to create and follow a budget that makes overspending nearly impossible.
Seek Financial Assistance
Sometimes we have to settle on the fact that no matter how much we work on our finances, a major expense is still a major expense, and it’s more than okay to seek the financial assistance we need to take care of it.
Here are a few tips on how to find the right programs and services for home loan assistance:
- If you are a first time homebuyer, fall below a certain income threshold, or are a veteran or public servant, you may qualify for a down-payment grant like the ones offered here.
- Maybe you have the ability to save money, but won’t be able to save the amount you need in your desired time frame—try a matched savings program. These programs ask you to commit to a set savings amount for your down payment and once you reach your goal, they’ll match you.
- Look for first-time homebuyer loans. These types of loans tend to have lower interests rates, and most don’t even require a down payment.
- Apply for a mortgage loan with a trusted partner. Having someone be a co-borrower means you both will be responsible for repayment as well as have joint rights to the home, making it ideal for couples, close friends, and family members.