How can your student loan debt affect buying a home?
We all know that furthering your education is never a bad choice; however, if you don’t properly manage the costs of your higher education after graduation, this once good decision can quickly turn sour. The modern American dream calls for a college degree that leads to a solid job, that leads to a nice home. While this dream has been realized by many, those who have been relaxed about their student loan repayment plan may have some additional hurdles to face.
If you have unpaid student loans and are trying to buy a home, it’s paramount that you make your monthly payments on time. Regardless of whether or not you are carrying around government subsidized loans, a delinquency on your student loans will negatively affect your credit and may keep you from qualifying for a home loan.
For your loan to become delinquent, you have to miss a payment (without making arrangements for forbearance or deferment). The delinquency period begins on the first day you fail to make a payment. While certain responsibilities to obtain payment fall on the loan holder (i.e. sending collection letters, or some other notice in writing, etc.), if you don’t make any payments for nine months the loan then goes into default. If your loan lands in default, the entire loan balance is then due at once, making this a very bad place to end up. On top of one large payment, being delinquent in paying back your student loans will also hurt your credit. While the effects depend on the period of time that’s passed between payments, a delinquent loan being reflected on your credit report can have lasting damage when applying for a home loan. It not only shows a lack of funds, but also a lack of proper planning when delinquency can easily be avoided by taking temporary relief in deferment or forbearance (neither of which affect your credit score).
While deferring your loans is much more beneficial to your long-term credit than letting loans fall into delinquency, it’s best to avoid having your student loans in deferment while applying for a home loan. The issue with having your loans in deferment is that the monthly loan payment is still counted into your income when applying for a home loan. Since you have to provide proof that your income doesn’t allow you to make monthly payments on your student loans, this arrangement could be detrimental in obtaining a mortgage. Deferred loans are generally considered to be a bit of liability to lenders, because they reflect poorly on your ability to make a potential mortgage payment. Borrowers going through the home loan process are also running the risk of their monthly student loan payment appearing to be more than it actually is on their credit report. If this happens, you will have to work with the student loan creditor to receive information on the total student loan balance and the actual monthly payments. While these factors seem like they’re working against your goal of owning a home, there are some government-insured loans (such as a Federal Housing Administration – a.k.a. FHA -- loan) that are more forgiving to those with deferred loans and a less than ideal debt-to-income ratio.
Another factor that is reviewed while applying for a home loan is the borrower’s debt-to-income (DTI) ratio. This ratio shows what percentage of a borrower’s monthly gross income goes towards paying debts. With the current, average student loan debt reaching to about $30,000, this debt-to-income gap can be detrimental. One tip to help keep your monthly payments down and help your DTI is to consolidate your loans (if you have student loans with multiple creditors). This will bring everything to one monthly payment, helping you manage your loans by decreasing the monthly interest charges. Much like deferred loans, FHA loans offer more flexibility in the lending process to those with a large amount of student loan debt.
Programs offered by the FHA:
Many borrowers who are trying to qualify for a home loan with student loan debt will fall under First-Time Homebuyer programs. These programs are great for those who are shopping for their first home and offer more flexibility to those with student loan debt, who also have a solid credit score and are making regular monthly payments. Another loan option that falls under the FHA is the 203(k) Rehabilitation Loan. For many with student loan debt, a fixer-upper may be better aligned with their income. If you decide to buy a home that needs some work, the 203(k) loan is a great option since it is designed to help you make renovations to the property. Another advantage to this loan is, after renovations are made, these updates may add value to the home making it a solid, long-term investment. When comes to getting pre-approved for a home loan with a large amount of student loan debt, the best route for many is to research programs offered by the FHA.
Our Housing Buzz Team understands how confusing the home buying process can be. When it comes to starting this process, it’s prudent to take the time to research the best avenues for your needs and situation. Once you understand what paths work for you, it’s wise to start working on your credit score, student loan debt, and other obstacles to get your finances where they need to be. This not only helps ease the pre-approval process, but also the paperwork involved when looking for approval on a home loan. To find out more about buying a home with student loan debt or for other questions, please feel free to contact one of our Team members today.
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