Every homebuyer wants a low mortgage par rate because it can save them hundreds of…
Buying a house is a major financial commitment, but taking on the responsibility of a mortgage pays off over time when you gain equity in your home. While you might be looking forward to knowing that your monthly payments are an investment to increase your wealth rather than money that is being sunk into rent. You could also be nervous about your ability to get a home loan when you are saddled with student loans.
The growing issue of student loan debt can impact how lenders view your ability to make payments, but you don’t have to let it ruin your dream of owning a home. You have multiple ways to address your debt while also building a strong financial profile that makes you stand out to potential lenders.
How Does Student Debt Impact Getting a Mortgage?
Mortgage lenders in Huntington Beach will ask you to go through the same steps to apply for a home loan as you would if you have other types of debt. During the pre-approval process, you’ll need to supply information about your financial situation such as income statements and a list of your monthly debts. The lender will also look at important numbers during the underwriting process such as your debt-to-income ratio and credit score. Having high student debt could affect how your overall credit history appears to lenders, but it’s good to talk to a mortgage professional before you assume you can’t qualify to buy a home.
What Is the Debt-to-Income Ratio?
The biggest way that student debt impacts your ability to get a mortgage is by increasing your debt-to-income ratio. This metric shows lenders just how much of your monthly income compared to your monthly debts. Lenders tend to have varying acceptance levels for DTIs. Some are okay with issuing a loan to people with a DTI of lower than 50%. Others may ask you to work on lowering yours to below 35%. Trying to make sure yours is as low as possible can help you to get pre-approved for mortgage loans so that you have the best chance of making a strong offer on a house.
How Do You Calculate DTI?
Figuring out your DTI helps you to feel more confident talking to a mortgage lender. You can start by making a few simple calculations. First, you’ll want to start adding up all the minimum payments that you currently make towards debt such as credit card, auto loan, and student loan bills. If you currently pay rent or a mortgage, then add that in there, too. You don’t have to include costs that are unrelated to standard debt. For example, you can leave out your grocery and entertainment expenses as long as you don’t pay them using a credit account.
Once you have your total debt expenses, you’ll divide this number by your current gross income amount. That’s the amount of money that you make before taxes are taken out. Finally, you’ll turn this total into a percentage rate by multiplying by 100. Ideally, you’ll see that it falls within the range of what most lenders find acceptable. If not, you still have options for lowering the DTI while making yourself a safer choice for lenders.
What Can You Do to Increase Your Chances of Getting a Home Loan?
Having high student loans can not only affect your DTI, but you might also worry about whether you can make payments on your debt and home without sacrificing your current lifestyle. If this is a concern, then taking one or more of the following actions can bring you some relief.
Explore the Different Loan Options That Are Available to You
Lenders can offer several different types of loans that might be advantageous for people with high student debt. For example, FHA loans are a type that is government-backed, which means that lenders may feel more comfortable extending a loan offer to someone with a higher DTI. VA loans are another option that is available to service members and their spouses. These sometimes get offered to people with a DTI that is over 50%.
Pay Down Debt to Improve Your Ratio
Another option to increase your ability to secure a loan is to pay down any debt that you can. Each time you pay down debt, you open up more potential room to use your income for a home loan. There are several methods out there to pay off debt, but the easy one is to tackle any small loans that make it possible to immediately eliminate those bill payments. Paying off debts with high-interest rates can also help you to lower your monthly payments faster.
Refinance Your Student Loans
If you prefer to focus on managing your student loan debt better, then refinancing might be an option that helps your situation. You can refinance both private and federal loans to get a better interest rate. This has the effect of helping to lower your payments, which can help to improve your DTI and make it easier to pay down your debt.
Use Federal Student Loan Consolidation to Lower Your Payment
Federal loan consolidation doesn’t typically help you to lower your interest rate, but it does give you the option of potentially being able to extend the terms of your loans. Although it might be frustrating as a borrower to see that your loan obligation will be around for longer, this has the upside of lowering your payments so that you free up more funds for a house payment. You can always make larger payments towards consolidated debt once your financial situation stabilizes.
Find Ways to Increase Your Income
In today’s side gig economy, you can often find simple ways to boost your income without taking on a second full-time job. Many home buyers temporarily pick up a part-time job or begin a side business from home. As long as you can document your income to show to potential lenders, you’ll find that bringing in more money helps you to pay off your student debt faster while also having more income to bolster your chance of getting your dream house.
Student loans are an investment that you make in your future earning potential, but they can sometimes feel like a burden when you go to buy a home. If you have high student debt, then it helps to know that you’re not alone and people in similar situations buy houses every day. Being smart and honest about how you handle your debt and present yourself to lenders is all it takes to get pre-approved for a loan so that you can start looking for your home right away.