You may assume you can’t afford to buy a home if you have student loan debt. However, the process of approval for mortgages involves many aspects, and there are ways to purchase a property, even when you have liabilities such as student loans.
What Lenders Look At
You may feel you need to pay off your student loans before purchasing a house, but you don’t need to be entirely debt-free to buy a home.
Lenders analyze your DTI (debt-to-income ratio) to decide if you can afford a new loan. This helps them identify whether you can feasibly manage all of your monetary obligations (including your student loans) with the addition of a home loan.
Typically, a debt-to-income ratio of 45% or less is where you want to be. If your DTI is higher, you still may qualify for a mortgage, but it indicates to lenders that the addition of a home loan might be too much for you to manage within your budget. Here’s how to calculate your DTI:
Step 1
Add up your total monthly debts (car loans, credit card payments, student loans, any other outstanding loans). Don’t include items like utilities, cell phone bills, or groceries.
Step 2
Divide your monthly debt total by your gross monthly income.
Step 3
Multiply the result by 100, which will give you a percentage (your DTI).
How Student Loans Impact Your Credit Score
Your student debt can positively or negatively affect your credit score, depending on your ability to make timely payments. Your credit score improves if you pay your loans on time consistently. Also, student borrowing helps diversify your credit, which is good for your credit rating.
On the other hand, student loan debt can hurt your score if you frequently miss payments.
The Down Payment
If student loans make it difficult for you to save a 20% down payment, you still have options. There are programs you may qualify for that have down payment requirements as low as 3%. Ask your lender to help identify those opportunities.
Start With Pre-Approval
Getting pre-approved by a lender can help you better understand the expenses of buying a house. In addition, once you secure your pre-approval, you will know the price range of homes you can afford, and sellers will be more receptive to your offers.
Some documents you may need for a pre-approval application include:
- Income history verified by W-2 statements from the last two years
- Pay stubs from the past 30 days
- Bank or other account statements from the past two months
- Tax returns from the past two years
- Record of any monetary gifts or recent unexplained deposits
We’re Here to Answer Your Questions
If you feel confident about your income and ability to pay your debts on time, you’re likely ready to take on a mortgage for a new house. We understand that everyone has unique factors that affect the type of lending that works best, and we strive to identify the right loan for you.
At Reliant Home Funding, we can help you find the best loan for your needs. Get in touch with us at (877) 937-6787 or online to learn how we can assist you with your homeownership goals.
