Are you a young person interested in becoming a first-time homebuyer but are worried your student loan debt may make this dream impossible? You’re not alone. According to a study from Consumer Reports National Research Center, 71 percent of millennials said they want to purchase a home but believe the money they owe for their education is too big of an obstacle.
For many young people, the financial burden of student loan debt is significant. Consumer Reports noted of the 25- to 34-year-olds surveyed, 41 percent owe, on average, $30,700 in college debt. However, increasing rent prices, particularly in desirable cities, often means these potential homebuyers are spending a significant portion of their monthly income on rent. The study found nearly a quarter of respondents spend more than 50 percent of their income on housing.
If you’re considering purchasing a home, but are unsure how your student loan debt will affect your mortgage application, it’s important to understand your debt-to-income ratio.
How Lenders Assess Your Education Debt
As Bankrate reported, along with the applicant’s credit score, the debt-to-income ratio is one of the most important factors for assessing creditworthiness. Your DTI is the percentage of your monthly income that is spent on debt payments—including mortgages, car payments, credit card payments, child support and student loans.
However, DTI is more complicated than a simple percentage. Lenders also look to see if your payments are current, deferred or defaulted. With student loan debt, if you’ve stayed on top of your debt and are making your regular payments, this can demonstrate to a lender that you are a responsible borrower.
Furthermore, your education can be attractive to lenders. An analysis from Zillow found having a lot of student debt doesn’t greatly reduce your chances of homeownership as long as you graduated, and especially if you attained an advanced degree. An education often unlocks greater career prospects and lenders will recognize that as evidence that you’ll be able to pay off those education loans over time.
How to Work With Student Loan Debt
Of course, your degree alone won’t make you an attractive mortgage applicant. As Bankrate noted, you need to do your financial homework. Start by determining your credit score. If your score is low, work on paying off more of your debts by saving money and making additional payments.
Also, the price of the house you’re hoping to buy affects your DTI. Factors such as property taxes, homeowner dues and interest rates will be considered when a bank assesses whether you can afford the monthly mortgage. That means applicants with student loan debt may benefit from considering more modestly priced houses, such as smaller homes or fixer-uppers, or areas with lower property taxes. While you might not be able to afford the first home you visit, you might yet fall in love with a more compact home in an up-and-coming neighborhood.
At The Federal Savings Bank we understand the importance of owning your own home. Visit our mortgage experts today to find out more about managing your student loan debt while applying for a home loan.
Michael Adler is a Senior VP at The Federal Savings Bank and recently opened up the bank’s new Teaneck office. His office is located at: 206 W. Englewood Avenue. He can be reached at: 201-225-9301 or via email at: [email protected]. You can look him up at: www.thefederalsavingsbank.com/meyeradler. NMLS#28172.
By Michael Adler
