Whether you just graduated college or you have been out for a while, student loan debt has a way of sticking around for a while. The good news is you might be able to secure financing despite having student loans still. Of course, it depends on a variety of factors including your credit score, debt ratio, and the amount of savings you have. Understanding how to secure financing for a house with student loans will help you make the most of your desire to own a home.
Student Loan Debt Affects Your Credit Score
Your student loan debt does more than cost you money each month. It affects your credit score too. Whether it affects it in a good or bad way depends on how you handle your debt. It is important that you make your student loan payments on time each month. If you make a payment even 31 days late, it negatively affects your credit score. If you continually let the payment stay late, you rack up even worse marks on your credit report as 60 and 90-day late payments really affect your credit score. Even if you brought your account current, those late payments tend to haunt you for the next 12 months. Mortgage lenders always look back at your credit history, which is why making your payments on time is crucial.
Another way student debt could affect your credit score is if you have large amounts of debt. It is normal for many people to have loans from several different banks. However, you need to pay them down to decrease their impact on your credit score. Having too many loans of one type can make your score decrease. It is a good idea to pay them down as much as you can before you apply for a mortgage if your credit score is too low for you to qualify.
Student Loan Debt Increases Your Debt Ratio
Your debt ratio plays an important role in the mortgage approval process. If your debts are too high, you could end up unable to secure a mortgage. Every loan program has different parameters, though. For example, FHA loans allow a DTI of 28 percent on the front end and 36 percent on the back end. Conventional loans, on the other hand, may allow a debt ratio up to 43% as that is the maximum allowed under the Qualified Mortgage guidelines. You will find different requirements with each lender.
Obviously, the more student loan debt you have, the higher your debt ratio. Even if you have deferred loan payments, the lender still has to figure a payment into the debt ratio. Your payments will eventually start and they will affect your ability to make your mortgage payment. Most lenders will calculate your minimum student loan payment at one percent of the balance of the loan for debt ratio purposes.
If you have large amounts of student debt, you have two choices. You can wait until you pay them off to apply for a mortgage. However, that might take too long. Your other choice is to refinance the debt into a lower payment. Oftentimes people consolidate multiple loans into one loan. This way they have one manageable payment. If that payment is lower than the total of all of the other loans, it could work to your favor for mortgage approval.
The Down Payment Matters
Student loans can obviously affect your ability to save. Generally, lenders like to see you put at least 20 percent down on a home. If a good chunk of your monthly income pays your student debt, though, this may be impossible. The best way to go about this is to secure FHA financing. With only a 3.5% down payment and flexible credit guidelines, you can secure suitable financing for a home. If you wish to purchase a $150,000 home, for example, a 20% down payment equals $30,000. With FHA financing, you would only have to put down $5,250. That is a difference of $24,750! Obviously, the FHA financing will be easier to obtain.
Keep in mind, though, you will have to pay mortgage insurance for the life of an FHA loan. This is true no matter the loan-to-value ratio of your loan. FHA mortgage insurance never goes away. In fact, FHA financing has two mortgage premiums – upfront and annual mortgage insurance. You pay the upfront premium at the closing and the annual premium on a monthly basis throughout the life of the loan. Right now, the upfront premium equals 1.75%. On a $150,000 loan, this equals $2,625. The annual premium you will pay equals 0.55%. On the same $150,000 loan, this equals $68.75 per month. Luckily, the annual MIP just dropped for 2017, which means more savings for you.
Securing a mortgage with student loan debt is not impossible, but it might require some creativity. You may have to work on your finances a little bit to make the numbers work. For example, if your credit score is too low, you have to take the time to improve it. If your debt ratio is too high, you may need to work with your student debt to refinance it into a more affordable loan.
Once you work things out, there are plenty of mortgage options out there. No program declines you strictly because you have student loans. They could decline you because you have too much debt or you don’t make your payments on time, though. Remember, lenders look back at your history – they don’t just look at the present. Take the time to make sure you are doing right by your finances throughout the life of every loan you have. You never know when late payments may come back to haunt you. If it comes down to it, though, you may have to pay off a few debts before you can secure a mortgage. If there is no other way to decrease your debt ratio, make the most of the situation and get your loans paid off as soon as you can.
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