There are more than 40 million Americans who owe student loans for their college degree. The average student loan debt is around $25,000, but many people owe much more than that. Many Millennials are delaying buying a new home or car because of high debt from their school loans. When adults have large sums of debt, it can affect their ability to make a purchase. However, you can still become a homeowner even if you have student loan obligations. Here are some simple ways to make your dream come true.
1. Live Within Your Means
It is easy to get carried away when looking for a home. Just because it is your first home doesn’t mean it must be your last. Get a starter home and work your way up. Once your student loan debts are paid off, you will be able to purchase a better home. Settle for the starter home, rather than that grand abode, the first time around.
2. Minimize Your Debts
Lenders take every applicant through an evaluation process. They look at your income, savings, credit score, and the overall debt-to-income ratio. They consider your overall financial obligations. Do you have a car, credit cards, student loans, and other monthly bills? They add up all your outgoing expenses and compare that to your income. The ideal range for a debt-to-income ratio should be around 36 percent or less. Consequently, your mortgage payment needs to fall within 36 percent too. To lower your percentage, you must pay off as many bills as you can. Paying off credit cards can be easily done by making more than the monthly minimum. Take some time and pay off your bills before even applying for a home loan.
3. Reduce Your Student Loan Payments
Having student loans will increase your debt ratio. If you have other types of debts too, you could be over the limit. To prove to the mortgage lender that you have enough money to pay your obligations, you need to lower your student loan payments. There are numerous programs out there that will allow you to reduce your student loan payments. You can refinance your student loans or you can switch to a payment plan that is income-driven. This will help reduce your monthly payments and your overall debt ratio. It is important to note that when you refinance your loans, they become a private loan rather than a government one. Thus, you will lose the federal protection that comes with a government loan.
4. Pay Your Student Loans On-time
When a lender reviews your credit history, they are looking for timely payments. They want to make sure that you make your payments on time. Do you handle your debt responsibly? Do you have a good credit report to show for your hard work? Even if you have student loans, you can be approved based on your stellar performance on other bills.
5. Have a Sizeable Down Payment
Many people think that buying a home is taking on a mortgage. While it is a monthly obligation, the up-front costs should also be considered. When you close on a loan, you will be required to pay closing costs and a down payment. Closing costs will include the mortgage insurance, home inspections, the loan origination fee, insurance premiums, and title fees. You should plan on having about five percent of the home’s list price to pay in closing costs.
The average down payment is around 20 percent of the home’s purchase price. Many borrowers are putting less money down and using PMI (private mortgage insurance) until their down payment has been reached. PMI is a policy that protects the lender until the 20 percent margin has been reached. Keep in mind the smaller the down payment; the more you will pay with interest. The real question is can you manage a mortgage and a student loan payment (which may be as much as a mortgage) at the same time.
6. Improve Your Credit Score
Unless your credit score is above 850, you have some room for improvement. The higher your credit score, the lower your interest rate. Take some time and pay down your bills before purchasing a house. Make sure to keep your credit card utilization at around 30 percent. Comb through your credit report and see if there are any errors. Cleaning up errors alone is a good way to boost your score. Make sure all your lenders are reporting accurate information. It is not uncommon to find errors on your credit report and these errors can drag down your score.
7. Consider Using Down Payment Assistance Programs
There are many down payment assistance programs to consider when buying a house. Some lenders will allow you to take out a second loan to pay for the down payment. However, a second loan usually has a larger interest rate. You can also consider an FHA (Federal Housing Administration) loan. Buyers who qualify to go through FHA will only need to put 3.5 percent down. Most home buyers can afford 3.5 percent rather than 20 percent. Avoiding PMI costs can make the mortgage more affordable.
Buying a home is a big step. With more than 47 percent of Millennials delaying to buy a house due to student loans, something must be done. The cost of a college education continues to rise. However, going to school should never stop you from having a place to call home.
