It’s no secret that student loan debt is a major issue in America. According to Forbes, more than 44 million borrowers owe $1.5 trillion — making student loan debt the second highest consumer debt category.
If you have student loan debt yourself, then it might not surprise you that many people say their educational debt has prevented them from becoming homeowners. A recent study conducted by the Urban Institute found that “if a person’s education debt went from $50,000 to $100,000, their chance of homeownership will decline by 15 percentage points.”
That’s backed up by data from the National Association of Realtors. “Eighty-three percent of people ages 22 to 35 with student debt who haven’t bought a house yet blame their educational loans,” CNBC reports.
Still, obtaining a mortgage while you have student loan isn’t impossible. Here are a few things to keep in mind as you weigh your options.
Your debt-to-income ratio, or DTI, is one of the most important factors potential lenders will consider when evaluating your ability to handle monthly mortgage payments. DTI is calculated by adding up your monthly debts, including your expected mortgage amount, and dividing that sum by your gross monthly income.
According to the government’s Consumer Financial Protection Bureau, “evidence from studies of mortgage loans suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments.” The CFPB notes that a DTI ratio of 43 percent is, in most cases, the highest ratio a borrower can have to still get a Qualified Mortgage — that is, a category of loans that has more “stable” features.
Another thing that lenders look at when they evaluate a mortgage application is the borrower’s credit score. According to U.S. News and World Report, paying your student loans on time every month is a good way to build your credit. However, late payments can drag down your score — and you’ll have to work with your student loan servicer to get current in order to start working to improve your credit. Not only do lenders use your credit score to determine how likely you are to pay back your loan, but those scores can also determine your interest rate. In general, the better your credit score, the better interest rate you can “score” on your mortgage.
Chances are, paying down your student loans has made saving money a challenge. But if homeownership is your goal, then you’ll have to put money aside for the down payment and other costs. Buyers typically put down between 3 percent and 20 percent of a home’s purchase price. Real estate experts have long recommended 20 percent as ideal, though it’s not necessarily a requirement. Just keep in mind that the more money you can put down, the less you will have to borrow. Your down payment can also impact your mortgage terms and rates.