Looks like student loans are replacing down payments as the no. 1 hurdle to homeownership. They have been named a major reason for the millennial generation’s lack or little participation in the housing market.
Truth is, you can buy a home and take out a mortgage even when you have student loans. The matter rests on your ability to take on another debt as large and major as a mortgage.
If you’re ready for the financial responsibility, it’s easy to bask in the perks of buying a home and keep in mind the do’s and don’ts in order to qualify for a loan. Yes, there is a way to achieve homeownership with student loans. [sc_content_link label=”Let us show you how.”]
The student loan debacle and homeownership
You graduated a few years ago and earn sufficiently. You realize that a sizeable portion of your monthly income goes to your student loans. What’s more, only federal student loan borrowers can qualify to have their education loans forgiven. You might well be in your 50s but paying your student loans still.
With income tied to student loans and whatever’s left earmarked for other expenses, it’s hard to come up with a decent down payment. Sadly, personal income has been slow to rise alongside housing costs.
Against this backdrop, you might ask why press homeownership to consumers with student loans? It’s because:
- You’ll enjoy tax breaks. The mortgage interest deduction is a major perk for homeowners, not available for renters.
- You’ll have equity. This equity is a very powerful tool. Homeowners can use it for debt consolidation to pay high-rate debts such as student loans. If your home value has appreciated, you can sell it at a higher price. When you are 62 or older, you can take out a reverse mortgage to turn this equity into a line of credit or periodic disbursements. Your rent payments won’t lead to any equity buildup and you can’t claim it either because it belongs to the landlord.
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So how to achieve homeownership with student loans?
There are three main factors that lenders look into when evaluating your loan application. Increase your chances of getting a mortgage by:
1. Credit. Take care of your credit standing. Refrain from applying for too many debts in a short span of time. This could result in far too many inquiries that would look to the lenders that you are desperate for cash. Keep your credit accounts open even when you’re not using them as they contribute to the length of time you’ve been borrowing money, your credit history so to speak. Rein in your credit card purchases and keep your credit utilization at healthy levels. More importantly, maintain a tidy payment history vouching for your willingness and ability to repay your debts.
2. Debt-to-Income. Expressed as the ratio of your housing expense and other monthly debt payments relative to your monthly income before taxes. Lenders have varying DTI eligibility requirements, depending on which loan program. The FHA can accept up to 43% DTI while conventional loans delivered to Fannie Mae can have debt-to-income ratios up to 50%. Student loan borrowers tend to hit a wall when mortgage lenders calculate their debt-to-income as it tends to be higher because of such debt. Fannie Mae has issued a new guideline regarding the exclusion of student loans in the calculation of DTI.
3. Down payment. While not technically a risk factor, a low down payment can inflate your loan-to-value ratio or increases the amount you need to borrow. The LTV is one risk factor that lenders look into. You can ask around for down payment assistance programs in your area. You can also ask your parents or loved ones to gift you a portion of your down payment. More importantly, engage a mortgage broker to help you find a lender who makes low down payment loans.
At the end of the day, it’s not student loans that are holding back millennials or anyone with student loans from homeownership. It’s borrowing too much that causes you to lose your income flexibility and hinders you from borrowing money for what matters such as a home. Luckily, there are ways to overcome that hurdle.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.