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It’s no secret that student loan debt is a major issue in America. According to Experian®, it grew to a record high of $1.57 trillion in 2020, outdoing debt from credit cards, personal loans, and auto loans and leases. If you have student loans, it might not surprise you that many people say it affected their ability to buy a home. In a study, the National Association of Realtors® found that among surveyed homebuyers, their debt delayed saving for a down payment “by a median of four years,” and that debt largely came from student loans.
Still, obtaining a mortgage while you have student loans isn’t impossible, and millions of people do it each year. Here are a few things to keep in mind as you weigh your options.
How student loan debt is calculated for a mortgage
Student loan debt factors into your debt-to-income ratio, or DTI. DTI is one of the most important factors potential lenders will consider when evaluating your ability to handle monthly mortgage payments. It’s calculated by adding up your monthly debts—student loans, car loan, etc.—and dividing that sum by your gross monthly income. The final figure is then expressed as a percentage. As an example, if you have $5,000 in monthly income and your monthly debts total $2,000, your DTI equals: $2,000 ÷ $5,000 = 0.4 or 40%.
Maximum DTI for mortgages varies by lender and loan type, but generally ranges between 40 and 50%.
How student loans affect your credit score
Another factor that lenders look at when they evaluate a mortgage application is a borrower’s credit score. According to CNBC Select, 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 improving 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.
Why your savings matter
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 homeownership costs (moving expenses, furniture, unexpected repairs, etc.). Buyers typically put down between 3.5% and 20% of a home’s purchase price, though no-down-payment mortgages also exist. Just keep in mind that the more money you can put down, the less you will have to borrow, and the lower your overall mortgage costs will be. Also, putting down at least 20% will let you avoid the added cost of private mortgage insurance (PMI), which typically adds 0.5–1% or more to a mortgage balance annually. Your down payment can also impact your mortgage terms and rates. Learn about low down payment mortgage options here.
Where you can get student loan relief
If you’re overwhelmed by your debt, don’t forget to check for programs that may help you repay it. Your state, or the state you’d like to relocate to, may offer incentives. Moneywise.com reports that Kansas, Texas, and Iowa have programs with assistance varying from $2,500–$40,000 in loan repayments for those who qualify. Resources are also listed around the web. You can visit USA.gov to search for student loan forgiveness programs in your state. And sites like The College Investor also list programs by state.
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