From DEBT owner to HOME owner?? What to do!

Buying a home is a major investment that requires strong financials. If you have a large amount of student loan debt, you may find it challenging to purchase a home for many reasons. From saving for a down payment, to qualifying for a loan, to affording monthly mortgage payments, student loan debt can play a significant role in your ability to buy a home.

Debt-to-Income Ratio
One factor that plays a part in how likely a lender is to approve a mortgage loan is the amount of debt you currently have. Lenders prefer that borrowers have minimal debt since taking on more loan payments increases the possibility that borrowers will default on at least one of their loans. The lender will compare your debt with your income, which is known as your debt-to-income ratio.

When a lender goes to calculate your DTI ratio, they will add up your debt from all sources: rent/mortgages, car loans, personal loans, credit card payments, student loans, child support, alimony, etc. Then they will divide that sum by your gross monthly income (before taxes) to see how much of your income is going towards these payments. You can do this same DTI calculation on your own to see where you stand.

If you have a high amount of debt and a low amount of income, your DTI will be relatively high. For a conventional home loan, it's best to have a DTI of 40% or less. If you apply for an FHA loan, you can be approved with a DTI up to 50%.

Reducing DTI
If you want to improve your DTI ratio, there’s no easy way around it, you will have to spend some time paying off your debt. It's also possible to reduce your DTI ratio by refinancing your student loan. However, this option will place a line of credit on your credit report, which means that you should refinance at least six months before applying for a mortgage. The positive payment history that occurs in the interim will offset the initial drop in your credit score.

Credit Score
Having a high credit score increases your chances of getting approval for a mortgage loan and securing a low interest rate. Your payment history is around 35% of your credit score, which means that a lengthy history of on-schedule debt payments is necessary. If you make your student loan payments on time every month, this should improve your score.

Saving for a down payment
If you are spending a few hundred dollars each month on student loan payments, you may be unable to save enough money for a down payment. While a down payment of 20% is recommended when purchasing a home, it isn't always needed. There are various programs and methods to purchase a home with a down payment of just 5-10%. An experienced agent like myself can talk you through all the options.

If you have student loans that you are currently repaying, buying a home will likely be more challenging. However, approval for a mortgage loan is more likely if you can reduce your DTI ratio, continue to make on-time payments, and you set your sights on an affordable home.