Guide to Getting a Mortgage With Student Loans
Going to college and getting a degree opens the door to higher-paying job opportunities, which can make it easier to afford a mortgage. But according to a survey by the American Student Assistance and the National Association of Realtors, “71% of student loan borrowers say student loans are one reason they've delayed buying a home.”
Mortgage lenders take several factors into consideration when approving home loan applications, including a borrower’s income and debt. Monthly debt payments can't exceed 43% of a borrower’s gross income for an FHA home loan, and conventional loans cap a borrower’s debt to income (DTI) ratio at 45%-50% depending on the borrower’s credit score, cash reserves and other factors. So if you earn $50,000 a year, or $4,166 a month, your total monthly debt payments (including your mortgage) cannot exceed $1,791 a month if you’re doing an FHA loan. Depending on how much you pay monthly for student debt, your payments could make it nearly impossible to qualify for a mortgage, or limit how much you qualify for.
Student loan repayment can take 10, 20 or 30 years based on your repayment plan. And if you postpone buying until you’ve erased this debt, you could miss out on low interest rates and the opportunity to build equity.
Buying a home with student debt has its challenges, but it's not impossible. Here are a few tips for getting a mortgage with student debt.
1. Look for low-down payment programs
If you're dealing with student debt, you might not have enough disposable income for a large down payment. Although standard conventional home loans require a minimum 5% down, there are conventional products designed specifically for people with low-to-moderate incomes that only require 3% down. Look into these programs to see if you qualify. If not, an FHA home loan is another option. This loan requires a minimum 3.5% down.
2. Buy cheap and move up later
If your student loan payments limit affordability, you might have to shut the book on buying your dream house. But this doesn't mean you can't buy anything.
Get pre-approved for a mortgage to learn how much you “can” afford to spend on a property, and then look for homes in this price range. These homes might not offer everything you're looking for in a property, but this is an opportunity to get your foot in the door and build equity. Remember, your first home doesn't have to be your forever home.
3. Wait one or two years before buying
Lack of an employment history can make it difficult to purchase a home fresh out of college. This is because mortgage lenders require stability and a two-year employment history. If you’re currently unable to purchase, spend the next one or two years preparing for homeownership. Look for higher-paying jobs that'll make it easier to juggle monthly payments, and keep your expenses to a minimum. This puts you in a better position to save up for a down payment and knock down your student loan balance
4. Find employers offering student loan repayment
Some employers offer amazing fringe benefits, including student loan repayment. There's one caveat. In most cases, you must agree to work with the company for a set number of years. This is a fair trade off since you can potentially save hundreds every month. If your employer offers student loan repayment, these monthly payments are excluded when lenders calculate your debt-to-income ratio, which helps you qualify for a bigger mortgage. You must provide documentation of this agreement with your employer.
Student loan repayment can cost you hundreds every month, which is money that could go toward a mortgage payment. If you’re juggling student debt and don’t know if you’ll qualify for a mortgage, give Cherry Creek Mortgage a call and discuss your options. Between low down payment mortgages and other unique programs, getting a mortgage might be easier than you think.