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More than 44 million borrowers in the US have student loan debt totaling over $1.5 trillion. For students, recent grads, or those who have advanced degrees with lots of debt, it might seem like home ownership is out of the question because of financing. The Triangle Area is home to some of the best academic undergraduate, graduate, and medical and law programs in the United States and we have helped hundreds of students, recent graduates, and those with considerable student loan debt, successfully buy real estate. We want to assure you it's not impossible. Here is a short guide to buying, with student loan debt even in the current market.
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Spend the Time to Improve your Credit Score: Regardless of whether you have student debt of not it all starts here. A good FICO score between 750-850 will secure you a mortgage and the lowest interest rates. This doesn't mean a those with a lower score can't get financing; only that the terms won't be quite as good. If you are concerned that your student loan borrowings detract from your credit score, that is not the case. A great credit
score does not come from not borrowing, quite the contrary. Your credit score depends on the ratio of what you have borrowed to what you pay back, and is taken by three separate sources. See our complete resources on building a credit score before borrowing below. -
Reduce the Debt to Income Ratio: Either reduce your debt or increase your income. The debt to income ratio is the amount that you pay monthly repaying your debts divided by your income. Lenders want to be sure that you have enough income to cover debt obligations and living, so they pay close attention to this ratio. Student Loan debt tends to carry a very low interest rate, our advice is to pay the minimum monthly amount due and use any extra money you might have to pay off higher interest rate debt like credit cards first.
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First Time Home Buying Incentives. Depending on your state, there are programs available to those with student loan debts to qualify for home ownership. Many lawmakers considered the impossibility of getting traditional loans because of the burden of debt repayment, and have concessions such as marital and family that help borrowers with student loan debt become homeowners. In NC there are three such programs. Check them out here.
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Payment History Vigilance: Be vigilant with all of your payments. This may sound obvious, but pay painstaking attention to all of your bills and be sure that they are paid on time. When you are able to focus on paying off smaller debts with high interest rates. Do not skip payments and avoid making late payments. Focus on paying off any balances where you do have delinquent payments.
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Pre Approval: You have absolutely nothing to lose by getting preapproved for a mortgage. If you find that you cannot afford to buy a home with your present circumstances and debt, consider other neighborhoods or markets, or improving scores and income debt ratios. You would be surprised how easily you can increase scores and ratios to be more attractive to lenders and many of our lenders will offer you tips to qualify quickly.
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Consolidate Debt: If you have a number of merchant credit accounts or you have other numerous debts, consider taking out a
personal loan with a low interest rate to consolidate your debt, then work towards low credit utilization from there. This is a long term strategy, but it does not take a long time to see a difference in your score. Ideally you want to keep these types of debt under 10%, in other words if your credit limit with a particular credit card or merchant is $2000, you would ideally keep your balance in the range of $200. -
Student Loan Refi: Consider refinancing your student loans. This sounds complicated to many, but if you are paying very high rates each month, in comparison to your income, the debt to income ratio is not in your favor. Try refinancing with a 2.5-3% interest rate. These rates are substantially lower than federal student loans and in-school private loan. Each lender has its own underwriting criteria that includes a variety of other factors including your credit profile, income, debt-to-income and monthly cash flow. Also, if you are moving to the Triangle for work, employers sometimes have offers to help position their workforce more favorably for financing. This is particularly true right now as the labor market is tight. Don't be afraid to ask your employer or potential employer about student debt repayment; you might be pleasantly surprised.
The challenges students with debt face when they are looking for financing is the debt to income ratio, and being able to save enough for a down payment in this market. We are seeing less than 20% down being rejected, and your debt to income ratio needs to be much better than the average person, so any ways you can reduce debt prior to applying for a loan is suggested. We continue to see debt relief for students in the news and on the desks of lawmakers, because of the preponderance of people unable to get financing, due to student loans. Until there is a broader government initiative, we will still have the options above.
The Triangle has some of the top universities and postgraduate programs in the Nation, but they also are not cheap. Many graduates do not foresee themselves as homeowners until well after graduation, but there are lots of ways to become a homeowner, even with considerable student loan debt. If you are considering buying a home in The Triangle, and are curious what you might pre qualify for, or the market conditions, contact us today and one of our agents can walk you through the process. It never hurts to start preparing for homeownership.
Update: Since we published this Blog, there have been changes enacted by FHA:
The Federal Housing Administration (FHA) has changed the way student loan payments are counted when determining eligibility for federally insured mortgages.
The change is particularly helpful for student loan borrowers who are on an income-based repayment plan; whose loans are in an approved deferment or forbearance; or whose loans are not fully amortizing.
Previously, lenders were required to count 1% of the outstanding student loan balance toward monthly debt payments in those situations. That amount has been cut in half or even more in some cases.
If you or someone you know was previously unable to finance a home because student debt load was deemed too high, it makes sense to try again. My NC Homes has lenders we work with who can help you. Just contact us and we'd be glad to connect you.
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