Are you paying off your student loan debt? Well, you’re not alone as there are more than 44 million Americans who have student loan debt. If in the past you’ve made an investment in your education and now you want to make another investment in your new home, you may be questioning what options are available to you.
How will mortgage lenders consider my student debt?
The most crucial thing to keep in mind is that mortgage companies won’t be considering the total amount of student loans but rather how much you’re paying towards those loans every month. Lenders will look at your monthly DTI (debt-to-income) ratio when considering any loan for you. Your DTI ratio is calculated by dividing your entire monthly loan payments with your total gross monthly income. For example, your debt includes things like your credit card loan, your monthly student loan payment, any auto loan payment, and combines all of them with your future home loan payment. Then this number is divided by your monthly gross income (the money you earn before taxes). Remember, even if you have deferred payments on your student loan, lenders will still have to add your future student loan monthly payments towards your debt-to-income ratio.
You can lower your DTI ratio and increase your financing options by paying off one or two credit cards or refinancing your student loans. Moreover, if somebody else is assisting you with the payments of your student loan, like your parents or some other relatives helping you in making your student loan payment, lenders may be able to make you eligible for a loan without even considering your student loan payment in your debt-to-income ratio.
How much money do I need to purchase a house?
Your student debt payments most likely have also affected your ability to save money, thus making it hard for you to have enough money for a down payment or to pay for the closing costs. Although you might have encountered the myth that you need at least a 20% down payment to buy a home, you can put as little as 3 percent for the down payment.
Other than a down payment, there can be additional upfront costs when you’re buying a home. In case you don’t have enough money available for the closing, you can choose the option of a “no-cost” mortgage, where your closing cost is added into your mortgage in return for a marginally higher interest rate.
If you’re looking to buy a home and also have student loan debt on you, consult with a home loan lender to see what is the best option for you.