Having children and owning your own home is the classic American dream. Nowadays, there are plenty of obstacles that will stand between you and home ownership, one of the biggest being your student loan. Many student loans are comparable with the cost of a modest home, making it pretty difficult for a recent college graduate to become a home owner. Fortunately, there are some things that the young home buyer, who has recently received his or her degree, can do in order to buy a home before paying off that hefty student loan.
How Do Lenders Determine If You Qualify for a Mortgage?
Most lenders usually look no further than a mortgage applicant’s debt-to-income ratio. Before the recent economic recession, lenders were more lenient with home buyers who had student loans, but the housing market crisis has caused them to tighten debt-to-income requirements, in order to make sure that borrowers are able to pay back their mortgage loans. This, of course, was bad news for most recent college graduates, because having a good debt-to-income ratio with a student loan still being repaid is hard enough as it is.
When analyzing a borrower’s debt-to-income ratio to determine if they qualify for a mortgage loan, lenders typically review the front-end and the back-end debt ratios. The front-end ratio is related to the home buyer’s housing expenses, such as the principal, interest and tax, while the back-end ratio is related to other long-term debt that the borrower might have.
The student debt will, of course, be taken into account, and will affect the borrower in different ways depending on each person’s situation. For example, a single person with a student debt will have little chance of receiving a mortgage loan, a household with two debtors might encounter some difficulty when applying for a mortgage loan, while a household where only one person is in debt will be able to get a mortgage loan much easier.
Becoming a Home Owner with Student Loan Debt
Student life is very different than what you will experience after graduating college. A student’s life usually revolves around studying, mid-terms and parties, so when it is all over, real life might come as a shock, especially because you have to repay the money that you borrowed to pay for your tuition. Big student loans are very burdensome, and entry level jobs often pay just enough for you to be able to afford repaying your debt. Student loans can also have an impact on your credit score, so buying a home becomes that much harder. But there’s some good news, as well. By following these following steps, you can stop student loans from being such a burden, and get yourself on the right path to home ownership.
- Minimize your student loans. Student loans are designed to help you pay for your tuition and receive the proper education that will later help you secure a good job. Student loans should not be used to pay for vacations or the cost of going out to restaurants or movies. Besides carefully planning your budget, you can also reduce your student loan by working part time or applying for financial aid. Don’t be fooled into believing that you will be able to easily pay off your debt after graduating, and that you can have fun spending a lot of money during college. Before you know it, the fun times are over, and you will find yourself having to face the harsh realities of life, so carefully budgeting and cutting unnecessary expenses is a sure way of making your student loan smaller.
- Reduce your student loan debt. You may encounter some difficulty in finding a good job right after graduating college, so you should know that you have some options regarding your student loan. One option would be to call your lender and try negotiating your loan or your interest rate. Another option would be to extend your repayments, or even put a hold on your loan payments for a while, until your financial situation improves. Of course, these options will most likely result in having to pay a larger interest rate, so a proper analysis of your budget and future plans is required.
- Avoid creating new debt. Taking out a new loan or applying for a new credit card while you are planning to buy a home will severely impact your chances of receiving a mortgage loan.
- Keep making payments on your student loan. The only way to eliminate your debt is by paying it off, month by month, as agreed. Make paying off your student loan a priority and pay even more than the minimum payment required if you can afford it.
- Find a co-signer for the mortgage loan. Having a co-signer in your situation will help you qualify for a mortgage loan much easier. One of your parents or a relative can co-sign your mortgage loan, which will make them responsible in case you are not able to make your monthly payments anymore.
Buying a home while still paying off your student loan is not as easy as it used to be, but it’s far from impossible. By simply making regular payments on your student loan, you are already at an advantage in the eyes of most lenders. However, before applying for a mortgage you should sit down and have a serious look at your budget and future outlook. Make sure that you will be able to pay off both student and mortgage loans at the same time, as missing only a few payments can have a deep negative impact on your life, and ruin your financial situation for years to come.