How to buy your first home when you’re deep in student loan debt

How to buy your first home when you are deep in student loan debt

Buying a home for the first time can be a daunting experience. Tinkering together a down payment, qualifying for a mortgage, and hoping the inspection doesn’t reveal any problems with the home can be extremely fearful.

And if you have student loan debt hanging over your head – well, that can make the process even more nerve-wracking, especially when trying to get a popular government-sponsored initial home loan that allows low-cost loan payment .

If you are looking to buy your first home, especially when mortgage rates are enticingly low, be prepared for the following when you are still paying off student loans.

Government-sponsored loans can be difficult with student loans

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A borrower-friendly FHA loan can be a godsend if you’re just starting out and don’t meet the more stringent requirements of a traditional mortgage.

FHA mortgage loans that are insured by the Federal Housing Administration allow down payments of only 3.5% and have no minimum or maximum income requirements for borrowers. But there are other guidelines that must be followed.

• You must have a credit score of at least 500. If you haven’t seen your credit recently, it’s very easy these days to get a look at your credit for free.

• You must have a credit score of 580 or higher to pay the 3.5% minimum deposit. If your score is lower, you will need to drop 10%.

• Your debt-to-income, or DTI, ratio must be 50% or less. A DTI ratio is a tool that lenders use to determine if you believe you can manage a mortgage payment in addition to your existing debt.

The latter becomes difficult when a borrower has student loans outstanding.

Why Student Loans You May Turn Down For An FHA Loan

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For example, let’s say you have $ 100,000 in student debt but have an income-based repayment plan and are only paying $ 200 a month on your loan.

When determining your DTI ratio, a lender must consider a monthly payment for your student loan, using either the payment amount noted on your credit report or 1% of the remaining loan balance, whichever is greater. And 1% of $ 100,000 would be $ 1,000 – a hefty payment to be made every month.

The story goes on

That math often erases a borrower’s ability to qualify for an FHA loan, says Jennifer Hughes Hernandez, senior loan officer at Texas-based Legacy Mutual Mortgage.

She has seen cases where the borrowers were teachers whose student debt was canceled after 10 years through the government’s public loan program. But they still couldn’t qualify for an FHA mortgage.

“There are people I have to say to them, ‘No, you can’t buy a house.’ And they say, ‘Wait a minute, I’m a teacher and they’re going to give me (my student loan) 10 years from now. Are you telling me that I can’t qualify? ‘ And I say, ‘Yeah, that’s what I’m telling you,’ “Hernandez told MoneyWise.

She says conventional mortgages generally have stricter requirements but are much more lenient when it comes to student loans.

Even so, to qualify for a traditional loan, a borrower must have a pretty good credit score – significantly higher than what the FHA requires. If your balance needs to be edited, you may be able to contact a service that can help you build your balance towards a higher score.

Steps to Qualify for an FHA Student Debt Loan

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Let’s say an FHA mortgage sounds like a good choice to you, but you are concerned that your college debt will not qualify you. Here are a few steps you can take to improve your eligibility.

You could try refinancing your student loan debt into a new personal loan at a lower interest rate. Student loan interest rates from private lenders have hit all-time lows so you can convert your debt to a cheaper loan to pay off your balance faster and get you into a home.

If you’ve been drawing your attention to the news lately, you know that President Joe Biden is considering cutting at least $ 10,000 in student loan debt for each borrower. Note, however, that if it ever comes, his forgiveness will cover federal student loan debt, not private one.

If other types of debt are burdening you, switching your balance to a cheaper debt consolidation loan could be a good option to improve your financial stability and pay much less interest.

Also, look for other ways to cut expenses and possibly save a little more on the down payment on a home. If your auto insurance needs to be renewed, use a website that makes it easy for you to compare policies and make sure you are paying the lowest possible price.

You can also make a little extra on your down payment by investing in the emerging stock market – even if you don’t have a lot of cash. With a popular app, you can build a diversified portfolio with little more than “spare money” from your daily purchases.

source https://collegeeducationnewsllc.com/how-to-buy-your-first-home-when-youre-deep-in-student-loan-debt/