buying a house when you have student debt - Student Tax OPtion

You can still buy a home — even with student loan debt

It’s a fact — more than two-thirds of American college graduates have student loan debt. Compared to the early 1990s, these graduates are also walking across the stage with higher amounts to repay. As a result, young Americans are purchasing fewer homes. Their eligibility for mortgages is at risk because of high monthly payments or inconsistent payment history.

According to the National Association of Realtors, more than 80% of people, from ages 22 to 35, list their school loans as the primary reason for not purchasing a home. In the early 1990s, the average amount of student loan debt was $9,000. Today, the average amount of student loan debt is $30,000. For these adults, a mortgage is just one more loan. Student loan debt is often higher than credit card debt or even the value of car loans.

While having student loan debt may add some twists and turns to the homeownership journey, experts say that there is hope. It is possible to buy a home with student loan debt — even while still facing the task of paying off a large financial burden.

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John Doe, Nashville

Know the impact

Before you apply for a mortgage, it is best to understand how your student loan debt can impact how you will be perceived by lenders. With student loan debt, mortgage lenders closely examine your eligibility — and if you are in the best position to make monthly payments.

Having student loan debt can reduce the chances of having your loan approved. It can also lead to a higher interest rate. While pursuing homeownership, it is best to make student loan payments on time. Lenders take notice of your payment history.

Also, lenders will look at the total amount of your debt as they consider a monthly payment. Using a debt-to-income ratio, lenders make a decision on whether they can depend on you to hold up your end of the bargain as a borrower.

Lower your payments

As lenders are looking at your debt-to-income ratio to make a decision about your mortgage payment, lower payments are most helpful. At least a year before pursuing homeownership, explore ways to lower your monthly payments. If applicable, consider an extended payment plan or one that is based on your income.

Many government agencies are also the backbone of mortgages. This includes the US Department of Veteran Affairs and the US Department of Agriculture, among others. While lowering your payments, do your research before selecting a mortgage lender. Choose a lender that works with and is knowledgeable of government programs.

If you’re unable to lower your payments, think about ways to bring in more income. This helps with your debt-to-income ratio. Lenders will still see the student loan debt, but they will also see that you have enough income to faithfully pay your debt. If you’ve been working with a company for a while, consider asking for a promotion. If you have extra time on the weekends or evenings, explore part-time job opportunities in your neighborhood.

Avoid these mistakes

While deferments and forbearance lower your monthly payment to zero, this option can pop up as a warning sign to mortgage lenders. It may be an alert to financial struggles, which can impact your eligibility for a loan. What may seem like a quick fix may not be the best solution for attempting to lower your payments.

It is also recommended to not jump into the mortgage application process until you are financially ready. This means that you have a steady loan payment history and that you are working to reduce your student loan debt, among other expenses. If you are not quite ready, try your best to catch up on payments and remain in good standing before beginning the journey to homeownership.

Consider applying with another person

If you’ve tried other options for lowering payments and increasing your income, you have one more alternative to consider: Apply for a mortgage with another person. This could be your spouse, significant other, family member, or friend.

Adding another person to the mortgage application process should not be a rushed decision. Discuss the details of the process and any financial commitments. Speak with a financial advisor if there are any questions. Going in this direction will show lenders a much greater income and a higher credit score. Both of these factors are important.

If you feel like you have explored all of your options for homeownership, keep working to lower your debt total. Try again when you are either able to gain more income or decrease your monthly payments. There is hope for future homeownership. Stay focused on paying off debt and apply for a mortgage when you are best prepared.

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