Applying for one loan while paying off another one is always tricky. Lenders are happy to approve borrowers with minimal debt, as taking out a second loan payment increases the risk of default on one or both of the loans.
This consideration becomes even more important when you take out a mortgage and yours at the same time Student Loansas these are two of the main forms of debt that most people will encounter. Aside from the approval challenges, student loans can also make it harder to save on important things like a down payment, closing costs, and moving costs.
Here is a more detailed breakdown of how a student loan can affect buying a home, and what you can do to minimize those effects.
How Student Loans Affect Home Buying
There are a number of different ways that your student loans can affect your finances, including your debt-to-income ratio, your savings potential, and your credit score. All of these could help you buy a home.
Student loans increase your debt-to-income ratio
Lenders take advantage of the Debt-Income Ratio (DTI) to decide how much you want a mortgage to be. DTI is all of your monthly debt payments divided by your gross monthly income.
Most mortgage lenders require that your total DTI ratio, including your expected mortgage payment, be 43 percent or less. A large student loan payment could push your DTI above the 43 percent threshold, making it harder to qualify for the type of home you want.
Student loan payments affect your ability to build savings
Buying a home requires an upfront payment, which is typically several thousand dollars. Borrowers with student loan payments may have difficulty saving a down payment in addition to their monthly student loan bills, which can slightly delay their ability to purchase a home.
The student loan payment history affects your credit score
Payment history is the most important factor in yours credit-worthinesswhich is 35 percent of the total number of points. Borrowers with a punctual track record will see their score increase, while those who are late paying their student loans will see a lower score. Consumers who have defaulted on loans will also see a drop in their score.
Mortgage lenders weight your creditworthiness heavily in determining your chances of approval and your interest rate. If you’ve had difficulty paying off your student loans on time, your chances of getting a mortgage could be affected.
The good news for borrowers? Credit bureaus generally give more weight to recent mistakes than past ones, which means any mistakes you made at the beginning of your student loan repayment will matter less over time.
Ways to Buy a House Despite Student Loan Debt
Many people who buy a home also have student loan debt. There are a few ways to manage your student loan debt when buying a home:
- Application for advance payment grants: Local and national Down payment support programs can grant down payment grants to first-time home buyers. These grants cover part or all of the deposit. Borrowers usually require a credit score of 600 or more.
- Check out 0 percent down payment loans: Past and current service members are eligible for VA loanthat do not require a deposit. Those who buy houses in rural areas can also do one USDA loanthat has a 0 percent deposit.
- Decrease your DTI: Because the DTI only takes into account your monthly debt payments and not the full balance, you can reduce the DTI by paying off some small debts quickly. If you can make additional payments on one of your smaller loans and be able to pay it off, you may be eligible for a larger mortgage.
The best ways to pay off your student loans
If you want to minimize your debt by paying off your student loans, there are a few ways you can make this process easier.
Refinance at a lower interest rate
Borrowers who have borrowed at high interest rates should consider Refinance at a lower interest rate. Refinancing at a lower rate saves you interest and may lower your DTI, making it easier to qualify for a mortgage.
Let’s say you owe $ 80,000 in student loans with an interest rate of 6.8 percent and a ten-year term. Using a Student loan calculator, you can see that your monthly payment is $ 920 and you are paying a total of $ 30,477 in interest. If you refinance for a 10-year term at a 4 percent interest rate, your payments will drop to $ 810 per month, which will lower your DTI. You will also save a total of $ 13,282 in interest payments.
If you opt for a longer term than your original refinance, your DTI will also drop significantly as your monthly payments will be lower. Since student loans cannot have prepayment penalties, you can add extra pay off your loans and repay them faster.
Those with federal loans should be aware that refinancing removes benefits such as extended deferral or deferral, income-based repayment, and loan waiver. Borrowers with personal loans will see few disadvantages.
Work towards forgiveness
Teachers, nurses, and doctors working in low-income areas may be eligible for state and local award programs. Check your state and local forgiveness programs to see what is available.
Find an employer that will pay back student loans
More and more companies are offering student loan repayment as an employee benefit. Some employers adjust their student loan payments or offer their own repayment program. Check with your HR manager to see what options may be available.
Set up automatic payments
Many government and private loan service providers offer borrowers who set up automatic payments an interest deduction of around 0.25 percent. This is an easy way to lower your interest rate and make sure you always pay on time. As a bonus, this on-time payment history increases your creditworthiness.
Claim the interest deduction on the student loan
You can deduct up to $ 2,500 in federal and private student loan interest each year on your state income tax return. You can claim the interest deduction for the student loan even if you do not provide individual proof. The student loan interest deduction could save you a few hundred dollars in taxes – money that you could invest in your student loan instead.