Many Millennials have decided to put off buying their first home due to the student loans they are stuck paying back. Millions of students have taken out student loans and end up repaying them for many years after they graduate. When you have student loans, the last thing you want to do is take on even more debt. Luckily, there is a way to still achieve the American Dream and own a home even when you have student loans.
Improve Your Credit
Your FICO score is a major factor when applying for a mortgage. Lenders will look at your score to determine if you are qualified for a loan and will even base the interest rate on your score. The higher your score, the better it is!
When considering buying your first home, check your credit score to get an idea if you can realistically receive a loan. If your credit score is lower than you thought, there are a few ways to improve it.
First, try not to miss any payments on your credit cards. Use your credit as little as possible. While you may have a large credit limit, it’s never wise to use it all up. Lastly, keep old accounts open because if you’ve had a line of credit for a while it can improve your credit score.
Debt to Income Ratio
Another factor that lenders will consider is your debt to income ratio. This is the percentage of your income you spend each month repaying your debt. A good rule of thumb is that no more than 36% of your monthly income should go to repaying debts like student loans or a mortgage.
To decrease this percentage, you have a couple of options. The first is to increase your monthly income. This may mean getting a second job or receiving a promotion at work to give your paycheck a boost. The second is to consolidate, refinance, or cut down the monthly payment of your student loans. This could be in the form of signing up for a new repayment plan, paying off what you can, or refinancing for a lower interest rate.
Pay Off What You Can
Before you schedule tours of homes on the market, you may have to pinch some pennies and put more money towards your student loans to lower monthly payments. These few months of sacrifice will really pay off in the end once you find your dream home and are approved for a mortgage. This means overpaying each month or even paying off one of your student loans completely.
Once you have done your research, improved your credit score if necessary, and have a good debt to income ratio, it’s time to talk to mortgage lenders. They will ask you a lot of questions about your finances to determine if you are eligible to receive a mortgage loan. Make sure to shop around and talk to a few different lenders because each one will offer a different interest rate and terms.
Down Payment Assistance
Now that you have been approved for a mortgage, it’s time to figure out the down payment. While you may have some money saved, it may not be enough for a full 20% down payment. Ask your real estate agent or do some research about first time home buyer grants and programs in your area. This can be extremely helpful when buying a home when you have student loans.
Are You Ready to Buy a Home When You Have Student Loans?
Taking on even more debt can be scary. However, you can’t let student loans hold you back from owning your first home. Investing in property is one of the biggest and sometimes the best investments people make. By improving your credit score and debt to income ratio, you can get preapproved for a mortgage and even receive assistance for your down payment.