How can I purchase a house with pupil mortgage debt? (Podcast)

Buying a house with student debt? You're not alone

Student loan debt can feel like a burden. But it doesn't have to hold you back from your goals – especially from buying a home.

As mortgage advisor Ivan Simental recently said on an episode of The Mortgage Reports Podcast, "You can definitely buy a home with student loan debt."

Want to buy a home but still have debt on a student loan? Here's what to do.

Check your eligibility to buy home with student debt. Start here (10/18/2021)

Hear Ivan on The Mortgage Reports Podcast!

Two tips for buying a home with student loan debt

Student loans can have a huge impact on your home ownership plans.

Making large loan payments every month means there is less money left to pay for a mortgage. And that can reduce your home buying budget.

If you are worried about a student loan when buying a home, there are a few strategies that can really improve your chances of success:

Reduce yours Debt-Income Ratio by paying off smaller loans and keeping the card balance low. Increase your credit score as much as possible to improve your creditworthiness

In short, student loans can have an impact on your housing budget – but they shouldn't stop you from buying in full.

Talk to a mortgage lender about your loan options and find out how much home you can afford.

Check your eligibility to buy home with student debt. Start here (10/18/2021)

Strategy 1: Reduce Your Debt-To-Income Ratio

Your Debt-To-Income Ratio (DTI) is how much of your monthly income is covered by debt and is an important part of any loan application.

According to Simental, DTI is particularly important when buying a house.

"We (mortgage lenders) want to make sure that 1) you are responsible and 2) you can actually afford the payment," he said.

Typically, mortgage lenders will assume that the payment of your student loan will be 0.5% to 1% of the total loan amount. You will then add this payment to any other debt payments you may have (car loans, credit cards, etc.) and measure it against your income. So they know which mortgage payment you can easily afford.

To ensure that you have the best chance of qualifying for a mortgage, keep your debt-to-income ratio as low as possible. These five tips can help:

Avoid credit card debt

You have likely received loads of credit card offers over the years – some may even have serious benefits like free airline miles or interest-free periods. While these can be tempting, it's important to avoid credit card debt as much as possible.

Credit card debt not only increases your debt-to-income ratio, it can also affect your credit score (and that will affect your mortgage application, too!)

"Don't go into credit card debt," Simental said. "Just say no. I promise you won't regret this advice."

Pay off your other debts as much as possible

You likely won't be able to pay off your student loan debt right away. But if you can lower some of your other, smaller balances, it will help your debt-to-income ratio immensely.

This could mean making an extra payment on your car loan, paying off your credit card, or putting an extra $ 100 on another loan or debt that you may have.

Increase Your Income

Higher income will also lower your DTI rate, so ask your boss for a raise, take on a sideline, or increase your hours if possible. If you can increase your take-home wage, it can help your mortgage application. In some cases, it can even help you qualify for a larger home loan.

Refinance or consolidate your student loans

Refinancing your student loan can help you get a better interest rate and lower monthly payment, which will also lower your debt-to-income ratio. If you have multiple loans, consider consolidating them – or combining them into a single loan. This can often reduce your payment as well.

Consider an income-based repayment plan

If you have a government student loan, you can sign up for something called an income-based repayment plan. These plans base your monthly payment on your salary – so if you're not making a lot, your payment will be incredibly low. Not only does this make it easier to manage your student loans, it also lowers your DTI.

Strategy 2: Increase Your Credit Score

In addition to your debt-to-income ratio, your creditworthiness is also an important factor in your ability to qualify for a mortgage loan.

As Simental put it, “If you have a lower FICO score, you are considered a risky borrower. Lenders wonder, "Why do you have a low credit score?" What did you do to make it low? ’"

The exact credit score that you need to qualify depends on your mortgage program. However, borrowers with a credit score of 740 or higher typically have the widest range of loan options and the best interest rates.

If your credit score is on the low end, there are a few steps you can take to increase it. You can:

Lower your credit utilization

Your credit utilization rate – the percentage of available credit that you actually use – is a big part of your FICO score.

For example, if you have a $ 10,000 line of credit and $ 9,000 in balance, you're using 90% of your available balance. If your balance is only $ 1,000, you have 10% utilization.

In general, the lower your credit utilization, the better your score. High usage rates tell lenders "you can't manage your money properly," Simental said.

Pay your bills on time

Payment history is another factor in your creditworthiness – and late payments can do you a lot of harm.

"If you're more than 30 days late, it'll do you," Simental said. "And that is very, very difficult to get rid of."

Late payments also show lenders that you are not responsible for your debts. After all, what is preventing you from being late with your future mortgage?

To prevent late payments from affecting your chances of buying a home, consider setting up automatic payment for your accounts and utilities. This ensures that your bills are paid on time at all times.

Keep your accounts open

It can be tempting to close a card or account after paying the balance. But in the world of credit, this can actually harm you.

That's because credit history – or how long you've had an account – goes into your score. In fact, it makes up 15% of that!

"If you want to cash out an account or keep your credit card zero, make sure you don't close it," Simental said. "If you close it, you will lose all of the good credit that you have on that account."

Avoid new lines of credit

After all, you shouldn't get new credit cards or new loans if you're planning on buying a home in the near future. These only trick you into spending more and adding a credit request to your report. These lower your score and can affect your chances of getting a mortgage.

Talk to a mortgage professional

Once you've prepared your creditworthiness and minimized your debt-to-income ratio as much as possible, it is time to speak to a mortgage professional.

They can guide you through the property buying process, provide tips and tricks on how to improve your application, and help you choose the right loan product for your budget and goals.

Your loan officer will also help you get pre-approval for your mortgage, which is the first step in buying a home. Once you have pre-approved, you can start looking for your dream home.

Confirm your new plan (October 18, 2021)

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