Home Purchase with Student Loan Debt

Gone to College - Loans

Student loan debt has become a major challenge when it comes to purchasing a home.  Approximately 45 million people carry student loan debt of an average of $30,000.  Some owe substantially more than that.

This fact can threaten three of the most important factors that are taken into account when it comes to getting a loan.

The first factor we are going to talk about is the debt to income factor.  When buying a home with student loan debt, you need to be aware that many lenders will be looking at your total debts. The numbers they prefer to see are 28 percent of your total income for housing income expenses or 36 percent of total debt including your new mortgage.

So what can we do to overcome this challenge?  Some questions to ask are:

  1. Can you reduce your debt by increasing your income by taking a second job?
  2. Depending on your student loan situation…can you refinance or consolidate them to get your payment lower.  Can they restructure your loan?  This may require you to “shop around” to some different lenders to ensure you have the best loan to fit your needs.
  3. Another question to ask yourself is if you can pay down some off your high-interest credit cards?  This may impact your monthly obligation quickly.
  4. Lastly, if you don’t have the cash to pay down a big chunk of your debt, can your refinance some of your other monthly obligations to lower your monthly payments?

The second factor is your credit score.  You can maintain a good credit score even if you have student loan debt.  Some things that affect your credit score are:

  • Paying your bills on time.
  • Do not utilize more than 30% of your credit lines.  For instance, if you have credit lines which include credit cards of $10,000, you do not want to have more than $3,000 utilized.
  • Don’t close your accounts once they are paid off.  When an account is in good standing, keeping it open can extend the length of your good credit, and increase your credit score.
  • Use different types of credit.  Having a good “mix” of credit will also increase your credit score.  (ie... credit cards, car loans, student loans.)

Also, request your free credit report once a year so you can review your report to make sure it is accurate, up-to-date and that there are no suspicious transactions.

The last factor to consider is your down payment ability.  Down payment size will determine which loan programs you are eligible for.

For example, a VA  mortgage or a USDA loan are both 100% financing so your only costs to consider would be your closing costs.

An FHA mortgage does require 3.5% down, although there are some programs in the state of Missouri or city grants that could assist.

It is really beneficial to talk with your loan officer to see what programs you qualify for and how that will affect your home search.

In April of 2017, Fannie Mae introduced some new policies to help those with student debt make homeownership for attainable.

  1. Student Loan Cash-Out:  This allows homeowners the flexibility to pay off their high-interest student debt while possibly refinancing to a lower mortgage rate.
  2. Debt Paid by Others:  If someone else is paying a credit card, auto loan or student it can be excluded from the borrower's debt to income ratios.
  3. Student Debt Payment Calculation:  Allows lenders to look at student loan payment information on their credit reports.  This will allow student loan debt to be considered when qualifying for a mortgage.

There are a lot of wonderful lenders in the Jefferson City area and I encourage you to reach out to them.  They can address any challenges you may have and give you a roadmap with goals to help you attain homeownership.

I know that first phone call can be kind of scary and seems a little overwhelming, but don’t be... as real estate professionals we are here to assist you!!!

Doreen McCormick

McMichael Realty, 369 S Summit Drive, Holts Summit, MO, 65043