If you are like most other college graduates today, you have almost $40,000 in student loan debt. While this number is big, should it prevent you from buying a home?
While you might not be able to save a large down payment while you are paying off your student loans, there are still loan programs out there that you can use.
Know Your Options
First, you need to know your options. If you have little to no money to put down on the home, you will likely need a government-backed loan, such as the FHA or USDA loan. The FHA loan requires a 3.5% down payment, but you can use gift funds for the entire down payment. The USDA loan doesn’t require a down payment, but you must buy a home in a rural area to use it.
If you have at least 5% to put down on the home and you have decent credit, you may qualify for conventional financing. Many people mistakenly think that they need 20% down to get a conventional loan, but that’s not the case. You will pay Private Mortgage Insurance while you owe more than 80% of the home’s value, but it could be worth it to have the conventional loan.
If none of these options work for you, subprime loans may be your only option. These loans aren’t necessarily bad, though. They just offer different guidelines, which may make it easier for you to qualify with your student loan debt.
Maximize Your Credit Score
One of the first things any lender looks at when you apply for a loan is the credit score. You need to make sure your credit score is as high as possible. In order to do this, you need to keep up with your payments. Don’t make any credit card, student loan, or personal loan payments late. If you made them late in the past, make sure they are up-to-date now so that your credit score can improve.
You should also minimize your outstanding credit card debt. Your credit score suffers when you have more than 30% of your available credit outstanding. If you know you overextended your credit, take the time to pay your balances down as much as you can.
Finally, make sure that you don’t have any errors on your credit report. It’s a good idea to check your credit score annually. You can get a copy of your credit reports free of charge at www.annualcreditreport.com. Go over each report slowly to make sure all of the accounts reported belong to you and that your credit history is reported correctly.
Keep Your Debt Ratio Down
One of the hardest parts about getting a mortgage when you have student loan debt is keeping your debt ratio in line. Lenders focus as much on your debt ratio as they do your credit score. Your debt ratio lets a lender know how much of your income is already spoken for with other debts.
Each loan program has their own debt ratio requirements and is as follows:
- Conventional loans 28% housing ratio and 36% total debt ratio
- FHA loans 31% housing ratio and 41% total debt ratio
- VA loans 43% total debt ratio
- USDA loans 29% housing ratio and 41% total debt ratio
If you have student loans, this could bring up your total debt ratio rather quickly which could make it hard to get a mortgage. If you do have a debt ratio issue, you can see what you can do about lowering your student loan payments. If you have federal student loans, you may be eligible for student loan repayment plans, which can lower your payments, making more room in your debt ratio for a mortgage payment.
If you have private student loans or you aren’t eligible for student loan repayment plans, you can also see if you qualify to refinance your student loan debt.
Get Help With a Down Payment
Many loan programs allow you to receive gifts for your down payment funds. If you have family members willing to help you with your home purchase, you can accept the gift funds by having them draft a gift letter stating the amount they are giving, the reason, and that it is not a loan.
FHA loans allow you to accept 100% of your down payment in the form of a gift. You don’t have to provide any of your own funds. If you take out a conventional loan, you may need to put some of your own funds into the loan unless you are able to put at least 20% down – then you don’t have to put any of your own funds into the loan.USDA loans don’t require a down payment as they allow 100% financing.
The bottom line is that you need to make yourself look as financially attractive as possible. Maximize your credit score, lower your debt ratio, and put as much money down on the loan as you can in order to increase your chances of securing a mortgage while you have student loan debt.