The Ultimate Guide to Buying a House with Student Loans
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The Ultimate Guide to Buying a House with Student Loans

In 2016, the National Association of Realtors conducted a survey and found out that at least 71 percent of those interviewed believe that student loans are their most significant obstacle to buying a home.

With at least 43 million Americans walking around with student loans, this means a huge number will have to wait a while before they can move into their dream homes.

While student loans might be necessary for you to complete your education, the consequences that set-in right after graduation can be demotivating. They can be demotivating to the point where graduates fail to apply for a mortgage with the fear of being turned down because of their student loans. Others fail to apply because the burden of student loans is overwhelming considering it’s not the only expense they have to deal with.

There is good news, however.

According to mortgage lenders, there are certain steps you can take in order to boost your chances of landing a mortgage. What’s more, loan guidelines have changed, thus making it easier for you land a loan.

The tips in this article will help you get that dream home even with student debt hanging over your head.

  1.    Analyze Your Credit Score

A credit score is a number which summarizes your ability to manage debt. Many lenders prefer the FICO credit score which starts from 350 and goes all the way to 800. The higher your score the better.

A score of about 750 and above is considered stellar credit, while anything under 600 is termed as poor credit. To land a mortgage with low fees and interest rates, you need to have a good credit score.

A number of factors will affect your credit score including late payments, debt-to-income ratio, and many others which will be discussed later on. Therefore, you need to focus on improving and maintaining good credit.

Credit bureaus collect and compile data on your credit history which will then be used to determine your score. This score is what lenders use to determine the risks you pose.

Access a free report from a reputable source and scrutinize it for any negative entries. Such entries can cause a dip in your score, thus hurting your efforts of securing a mortgage.

  1.    Keep an Eye Your Debt-to-income Ratio

As the name suggests, this ratio represents your total income against the debts you have. Many lenders also take a look at this ratio to determine whether you have the ability to take out another loan. This ratio determines whether more debt will affect your ability to take care of any other obligations including household expenses.

Financial experts recommend keeping the ratio at or below 30 percent for a chance to get approved for realistic loans with favorable rates. The best way to keep this ratio at safe levels is by doing these things:

?    Pay off all other outstanding debts

?    Find a way of earning more money or

?    Both

  1.    Make On-Time Payments

By making on-time payments, lenders get a sense of financial responsibility. According to FICO score calculations, your payment history takes the lion’s share of your overall credit score at 35 percent. This is not a figure you want to brush off.

One of the ways you can ensure punctual payment is by setting up an autopay function. This automatically will deduct payment from your account for the installments every month. In general, do these things and you’ll be safe:

  • Clear all outstanding balances
  • Don’t default any payment
  • Make punctual payments
  1.    Go for a Mortgage Pre-approval

This is how many people go about the mortgage process. They first start by searching for their dream home on any platform they can. Afterward, they walk up to their lender to seek a mortgage.

It’s about time you switch things up.

Start from the last step. Go to your lender and seek pre-approval first. This way, you’ll know exactly how much you qualify for. This will also allow you to know which house you can afford to purchase.

There are many factors which will determine whether you get pre-approved or not. This includes your credit profile, employment status, assets, income and other documents.

  1.    Maintain a Low Credit Utilization Ratio

A credit utilization ratio is a number showing your spending against your credit limit. This is another important factor your lender will be interested in.

Financial advisers recommend keeping this number at or below 30 percent. To get a better understanding of how to arrive at this ratio, let’s take an example.

If your credit limit stands at $5,000 and you’ve already used up $1,500, then the credit utilization is 30 percent. Here are a few steps you can take to maintain that 30 percent:

  • Consider setting up balance alerts to send you notifications once you surpass the limit.
  • You can talk to your lender to increase the limit
  • Instead of waiting for the end of the month to pay off outstanding debts, make some payments during the month to reduce the ratio.
  1.    Seek Down-Payment Assistance

You can seek down-payment assistance to help you make your first deposit. Depending on your credit status there are numerous options.

?    VA loans – this is for the people in military service

?    USDA loans – if you’re a suburban or rural homeowner, this type offers zero-down mortgages

?    FHA loans – You can get a federal loan courtesy of the Federal Housing Authority

In addition, there are a local, state, and federal assistance programs, so keep your eyes open for these offers.

  1.    Consider Consolidating Your Debt

This is a move many debtors take—often after failing to pay off their credit card balances. You can do this using a personal loan which comes with a reduced interest rate in comparison with the one on your credit card.

With a personal loan, you can save a lot of money through the repayment duration which ranges from three to seven years depending on the lender.

In addition, a personal loan can also raise your credit score since it’s an installment loan with a fixed repayment duration. In contrast, credit card debts don’t have fixed repayment durations. As a result, by switching to a personal loan, you reduce your credit utilization ratio while also showing a mix of credit. All of these things will increase your chances of landing a mortgage.

  1.    Consider Refinancing Your Student Loans

When lenders go through your debt-to-income ratio, your student loan payments will influence their decision. This is because they’ll be able to calculate how fast you’ll finish paying the loan.

To get a loan with lower interest rates, think about refinancing. This will enable you to convince the lender that you’re well on the way to being able to repay your loans in full. There are a number of lenders who offer interest rates as low as 2.5 to 3 percent.

However, before applying for student loan refinancing, you may want to look at various criteria the bank uses to qualify such requests. It doesn’t matter whether you have a private student loan or a federal student loan, you can still apply for refinancing.

Summary

Forget the myths: getting a mortgage while still repaying your student loans is possible. Follow the steps outlined in this article and you’ll be well on your way to buying your dream home.

However, if this loan is preventing you from taking out a mortgage, then it is best if you focus on repaying the student loan first. It might be stressful to continue renting, but it will be worth the wait since you’ll improve your score. This will then allow you to get a mortgage with favorable terms.

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