How to Buy a House with Student Loan Debt

Published on April 20th, 2016

Did you recently graduate college after taking out student loans? Are you still making payments while looking for a place to live? You’re not alone. Seventy-one percent of all four-year college graduates have student loan debt they are paying off – that is a total of 1.3 million students.

 

Unfortunately, most of these college grads didn’t take a class about how to manage their debt after graduation. That’s why we are here to help. Living the American Dream through homeownership is a reality that most students are unable to experience, due to high cost of living, loan repayments, car payments, and everything else that comes with being an adult.

 

If you’re a grad with student loan debt, it is paramount that you make your monthly payments on time. Any delinquencies on your student loans will negatively affect your credit and may keep you from qualifying for a home loan. Student loans have a huge impact on your ability to obtain a mortgage because of their large balance size and long-term repayment schedules. Below you will find solid advice to understand how to avoid delinquency, and learn some best practices to keep your debt under control. You will also discover which loan program may be best for you.

 

What is Delinquency?

Your loan will be labeled “delinquent” even if you just miss one payment. The delinquency period begins on the first day you fail to make a payment. 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 position to end up. On top of this elephant, being delinquent will also hurt your credit. A delinquent loan on your credit report can have a lasting impact 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).

 

What is Deferment?

Deferment allows you to postpone your federal student loans or temporarily reduce your payment amount. 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. Deferment can help you avoid a default loan status, but you have to prove that your income doesn’t allow you to make the monthly payments. This can be detrimental in obtaining a mortgage, since your monthly loan payment is still counted into your income with applying for a home loan. Deferred loans are generally considered a liability to lenders, because they reflect poorly on your ability to make a potential mortgage payment.

 

Borrowers going through the home loan process also run 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 FHA loans) that are more forgiving to those with deferred loans and a less than ideal debt-to-income ratio.

 

What should my debt-to-income ratio be?

Your debt-to-income ratio is an important factor underwriters examine when you apply for a home loan. This ratio shows what percentage of your monthly gross income goes towards paying debt. The average student loan debt is about $30,000, this debt-to-income gap can be detrimental. Consolidating your loans can help your DTI if you have student loans with multiple creditors. You may end up with only one monthly payment and this could decrease your monthly payments and potentially your interest charges.

 

What loan program is best for me?

Federal Housing Administration (FHA) loans may offer more flexibility in the lending process for those with a large amount of student loan debt. 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. When it comes to getting pre-qualified for a home loan with a large amount of student loan debt, the best route for many may be to research programs offered by the FHA.

 

What can I do right now to start the loan process?

At vLoan, we understand how confusing the mortgage process can be. Our innovative technology is blended with friendly customer service to guide you through the mortgage process seamlessly. Before beginning the mortgage loan process, it is a good idea to start improving your credit score, paying off your student loan debt, and overcoming any other obstacles to get your finances where they need to be. This will help ease the home buying process. 

We make it easier for you to get the right info you need so you can make informed decisions about your finances. If you have more questions about refinancing your student loan debt or purchasing a house, reach out to a mortgage advisor today to ask any questions about starting your online mortgage journey.

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