Students are graduating with a mountain of student loan debt — $28,650 on average, according to the Institute for College Access and Success. If your student loan debt looks anything like the national average, it can feel like a dark cloud hanging over your ability to buy a home. But student debt doesn’t need to stand in your way. Here are some tips to help you on your path to
Start with your credit score
Before doing anything else, get an idea of where you’re starting financially. Request a credit report at annualcreditreport.com and also check your FICO® score. A low credit score and a credit report with missed payments or a lot of debt can make it difficult to qualify for a mortgage. You’ll want a FICO score of at least 620, as most lenders require a minimum score of anywhere from 620 to 700.
Keep a low credit utilization
Check your credit limits from your credit cards and lines of credit — let’s say they add up to $10,000. Then, look at how much you typically borrow at once from your credit — say it’s about $4,000. That means your credit utilization is about 40%. However, lenders like to see a credit utilization below 30%. Spending less or making payments multiple times a month can help lower your utilization. You could also request a credit limit increase — just be sure to ask the lender if they require a hard pull on your credit, which can impact your credit score.
Lower your debt-to-income ratio
Your debt-to-income ratio (DTI) is a comparison of how much monthly debt you have compared to monthly pretax income and is expressed as a percentage. Lenders look at this ratio to see if you have enough income to pay for both your living expenses and debts. Most lenders look for a DTI of 36% or less when approving mortgages. To lower your DTI, you’ll either need to earn more money or pay off debt.
Refinance student loans
Tackle the problem at its source by looking at refinancing options for your student loans. You may be able to reduce your monthly payment or lower your interest rate, freeing up money to spend on a mortgage. However, be sure you do this at least six months to a year before applying for a mortgage. Refinancing any loan generally results in a hit to your credit score.
Get pre-qualified before searching for homes
Getting pre-qualified for a mortgage allows you to shop with confidence and focus on a price range of homes you can afford. It also gives you an idea of what your monthly mortgage payments would be in different scenarios and how much money you’ll need for a down payment. When lenders determine qualification, they generally look at your credit history, recent employment history, income, assets and tax returns.
Get help with your down payment
Saving for a down payment can be a significant hurdle, especially when you’re making payments on student loans and other debts. Down payment assistance is available through a number of programs for those who qualify, including First Time Home Buyer Programs, FHA Home Loan Programs, USDA Loans for low- to moderate-income homebuyers in rural areas and VA Loans for U.S. veterans and service members. Also keep in mind that your down payment can come from a variety of sources, including gifts from family members.
Make it happen
Student loan debt doesn’t need to be a barrier to homeownership. Make your dreams a reality with guidance from the lending experts. Fill out the form below or call us at (877) 820-2265 to schedule an appointment with one of our mortgage lenders to talk through your options.