student loan

Purchasing Your First Home When You Have Student Loan Debt

Students who graduate out of college in the U.S. have one thing in common: student loan debt.

A report from CNBC revealed that seven out of ten college graduates have huge student loans. Collectively, more than 44 million Americans around the country hold approximately $1.5 trillion in debt.

These debts hold back many aspiring home buyers. They make saving for a down payment incredibly difficult.

Although student debt could make life harder for you, it does not completely disqualify you from owning your first home. Here are a few ways to improve your financial situation and boost your chances of qualifying for a home loan:

Manage Your Debt-to-Income Ratio (DTI)

The DTI ratio refers to the percentage of your income that you allocate to pay off your student loans. Decreasing this ratio will boost your chances of getting a home loan approval and enjoying a favorable mortgage interest rate.

When applying for a mortgage, you want your DTI ratio to be less than 36 percent, as lenders favor candidates who fall under this category. If you’re unable to meet this threshold right now, don’t fret. Take these steps to fix your ratio:

  • Consolidate or Refinance Your Student Debt – This decreases your monthly loan payments, which improves your DTI ratio in the process.
  • Find Ways to Boost Your Income – If you’ve been working for the same company for years and performing well in your job, ask for a raise from your boss. Alternatively, you could get a second job, a side hustle, or a freelance gig to increase your take-home pay and get your DTI ratio in good shape.
  • Whittle Down Your Debt Whenever Possible – Use your holiday bonus, performance bonus, tax refund, and other funds to minimize your outstanding student loan balance.

Consider Various Types of Mortgages

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Qualifying for a traditional home loan, such as fixed and adjustable-rate mortgages, can be difficult if you have less-than-stellar DTI ratio. Rather than opt for conventional home loans, try your luck with government-backed mortgages.
An example of a federally backed home loan is the USDA mortgage. This type of loan is ideal for individuals who want to purchase a house in an eligible rural area. Another option you can consider is a mortgage backed by the Federal Housing Administration (FHA).

Besides these choices, inquire with your state about its assistance programs for first-time homebuyers. Some of these loan programs could decrease your mortgage interest rate, reduce your monthly payments, and more.

Obtain a Joint Mortgage

If you have a friend, family member, or fellow college graduate who wants to escape the rent race, team up with that person and purchase a home that benefits both parties. The benefit of a joint mortgage loan application is that the lender will factor in both your credit profiles and income. If your partner has a sound financial foundation, you could benefit from this and enjoy low loan interest rates and an easier approval process.

Debt from student loans can make your life difficult, but it shouldn’t prevent you from getting your first home. Working on your personal finances will help you manage your student debt and boost your chances to purchase the home you’ve always wanted.

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