Do you have home-buying fever? The symptoms usually include complaining about your apartment neighbors, creating Pinterest boards of dream kitchens, watching hours of HGTV, and in advanced cases, attending open houses under pseudonyms.
If you’ve been affected, you’re not alone. For many of us, home ownership is part of what we’ve envisioned for our adult lives. It also can be a personal accomplishment, a smart financial investment, a step towards putting down roots, and typically an expansion of your personal space.
However, home ownership (and a cure for that fever) can feel out of reach when you have student loan debt. It’s not. Millions of people qualify for a mortgage even with their current debt. It just requires more careful planning and budget management. Here are a few tips to get started.
How Student Loan Debt Affects Your Mortgage Application
Unless you have a large store of cash (that you aren’t using toward your loans), you’ll need to qualify for a mortgage loan before you can buy a home. Mortgage lenders will look at your financial history, assets, credit score, and employment to determine what amount of monthly payment, and thus what home price, you could afford without defaulting.
The main area where your student loan debt plays a role is in your debt-to-income ratio. Lenders will look at your monthly income compared to your combined monthly debt, including the projected principal, taxes, interest, and homeowners insurance on a property.
As an example, let’s look at someone who:
- Makes $3,500/month
- Owes $250/month in student loan debt
- Owes $120/month on a car payment
- Wants to purchase a home with a total monthly payment of $1,100
In this case, the total monthly debt is $1,470 and total monthly income is $3,500. Divide $1,470 by $3,500 and you get .42 or 42 percent debt to income ratio.
Most lenders will require a ratio of 36 percent or less to qualify an applicant for a loan, though there may be a few points of wiggle room.
How To Improve Your Chances of Getting a Mortgage
It’s possible to qualify for a mortgage when you have student loan debt, you just need to improve your debt to income ratio.
Evaluate Home Prices
The first step is work backwards with the equation above to determine the price of a home you can afford. Remember, you’ll want to look up the average cost for taxes and homeowners insurance, include any down payment before you calculate monthly mortgage, and research today’s mortgage rates to determine interest payment. Then figure out the price of a home you can afford right at this moment. Is it a $100,000 home? A $300,000 home? Are there homes in that price range fit your needs? If not, you’ll need to lower your debt or increase your income in order to qualify for a more expensive home.
Lower Your Debt-to-Income Ratio
There are two sides to improving your debt-to-income ratio. First, you can work on gaining more income, either by searching for a new job with a higher salary or taking on some side hustles in your spare time. Second, you can work on lowering your debt. A few ideas to get you started:
- Focus on paying down high-interest debt such as credit cards.
- Think about debt you can get rid of—for example, can you sell your car and take public transit?
- Refinance your student loans for a smaller monthly payment or lower interest rate.
Consider a Co-Borrower
Many people buy a home with a significant other, spouse, or family member as a co-borrower. Having a co-borrower affects your mortgage application in potentially positive and negative ways. Your debt-to-income ratio will be looked at as a whole and on one hand, your income will be higher, but on the other hand, so will your debt. Do the math to find out if adding a co-borrower to your mortgage application will improve or hurt your ratio. Apply jointly if it lowers your ratio, but if your potential co-borrower has a large amount of debt, you may want to consider leaving him or her off the application.
If you have home-buying fever, don’t worry. With some smart financial moves you can and will qualify for the cure.