How to your manage student loan debt when buying your first home
By Erik J. Martin
CTW Features
Your left hand clutches a freshly minted college degree with pride. Your other hand yearns to grab the deed to your first home, standing tantalizingly ahead with an open door inviting you forward. But there’s a ball and chain around your ankle preventing you from moving ahead. It’s your student loan debt. If you’re like most graduates, it’s a heavy and worrisome load to carry.
According to a new survey conducted by the National Association of Realtors and SALT, a consumer literacy program provided by American Student Assistance, 71 percent of borrowers who pay their student loans on time fear that their debt impedes their ability to buy their first home. Over half of all respondents expected their debt to postpone a home purchase by at least five years. Additionally, 42 percent of respondents indicated that higher education debt delayed a move out of a family member’s home following college graduation. Among respondents, 43 percent had between $10,001 and $40,000 in student debt, while 38 percent shouldered $50,000 or more.
It’s true that it can be more challenging for student loan borrowers to get approved for a mortgage or secure one with favorable financing terms. This is because student debt can lower a borrower’s credit score. A low score combined with a high debt-to-income ratio (a DTI less than 43 percent is preferred) can lead to a higher mortgage rate or loan denial.
“The lower your credit score, the more likely you have a student loan and may not qualify for a mortgage,” says Bethy Hardeman, chief consumer advocate with San Francisco-based Credit Karma. “But what’s also holding young people back from purchasing homes is affordability, the perception of the long-term value of homeownership, and the fact that many millennials don’t think they can get a mortgage.”
Daniel Manginelli, executive vice president of South Pacific Financial Corporation in Irvine, California, agrees.
“Many people with student loans are hesitant to purchase a home because they assume their student loan debt will automatically disqualify them. And unfortunately, the tougher lending guidelines implemented in recent years are making it difficult for them,” Manginelli says.
Dane Theisen can relate.
“The heavy burden of over $200,000 in student loan debt from the University of Toledo has made the idea of a first-time home mortgage next to impossible for me,” says Theisen, a 28-year-old tech entrepreneur who currently rents a home in Adrian, Michigan, while also shelling out around $1,000 a month in student loan repayments with help from his father. “My DTI was too high and I didn’t have as much money as I needed for a down payment.”
To help your homeownership chances, try changing the repayment terms on your student loans,” suggests Mark Kantrowitz, vice president of Strategy for Cappex, a Chicago-headquartered service that helps students search for colleges and scholarships.
“Requesting an extended repayment or income-driven repayment can reduce your monthly payment, thereby helping you qualify for a mortgage,” Kantrowitz says. “Or, ask your parents to use a home equity loan or line of credit to pay off your student loans, which you can pay them back for but which will get the loans off your credit report.”
In addition, maintain credit discipline by always paying your bills on time, not using too much of your available credit, and paying off your credit card balance in full each month, “which shows you’re using your credit responsibly,” Hardeman says.
Also, create and adhere to a budget, cut out nonessential purchases, and start saving as much as possible for your down payment.
“Your budget should adhere closely to 80 percent for living expenses and debt, 10 percent for monthly incidentals, and 10 percent for savings,” Manginelli says.
Lastly, consider adding a co-borrower to a mortgage loan, which can help lower your DTI. Find out if you qualify for a student loan deferment or forbearance. And explore an FHA mortgage loan – with this option, your closing costs can be as low as 3.5 percent of the home’s purchase price and your DTI can be as high as 43 percent with a down payment.
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