How to buy your first home when you have student loan debt

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How to buy your first home when you have student loan debt

How to buy your first home when you have student loan debt

Buying a home for the first time can be a daunting task. Collecting a down payment, qualifying for a mortgage, and hoping that the inspection doesn’t reveal any problems with your home can be very worrying.

And when you have student loan debt hanging over your head – well, that can make the process even more difficult, especially when you are trying to get a popular, government-backed, low-cost first-buyer home loan. payment.

If you really wanted to buy your first home, especially when mortgage rates seductively low, here’s what to be prepared for if you are still paying off student loans.

Government-backed loans can be tricky for student loans

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A borrower-friendly FHA loan can be a godsend if you are just starting out and do not meet the more stringent requirements of a conventional mortgage.

FHA mortgage loans, which are insured by the Federal Housing Administration, allow for a down payment of 3.5% and have no minimum or maximum income requirements for borrowers. But there are other rules that need to be followed.

  • You will need to show a credit rating of at least 500. If you haven’t seen your rating lately, it is very easy these days take a look at your credit score for free

  • You must have a credit rating of 580 or higher to make a minimum down payment of 3.5%. If your result is lower, you will need to put 10%.

  • Your debt to income ratio – or DTI – must be 50% or less. The DTI is a tool lenders use to determine if they believe you can manage mortgage payments in addition to existing debt.

The latter option is complicated when the borrower has outstanding student loans.

Why Student Loans Can Lead to FHA Loan Denial

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Let’s say you have a student debt of $ 100,000, but you are using an income-driven repayment plan and only pay $ 200 a month on the loan.

When determining your DTI ratio, the lender should take into account the monthly payment on your student loan using either the payment amount shown on your credit report or 1% of the loan balance, whichever is more… And 1% of $ 100,000 would be $ 1,000 – a hefty monthly payment.

This math often negates a borrower’s ability to qualify for an FHA loan, says Jennifer Hughes Hernandez, senior loan officer at Texas-based Legacy Mutual Mutual Mortgage.

She saw cases where the borrowers were teachers whose student debt was canceled as part of the government’s government service loan forgiveness program after 10 years. But they still couldn’t qualify for an FHA mortgage.

“There are people to whom I have to say, ‘No, you cannot buy a house.’ And they are like, “Wait, I’m a teacher, and they will forgive (my student loan) in 10 years. Are you telling me that I cannot pretend? ‘And I’m like,’ Yes, that’s what I’m telling you, ‘Hernandez tells MoneyWise.

There are stricter requirements for conventional mortgages in general, she says, but they are much more lenient when it comes to student loan debt.

Even so, the borrower must have a fairly good credit rating in order to qualify for a regular loan – significantly higher than what the FHA requires. If your loan needs work, you can contact a service that will help you increase your credit to a higher score.

Steps to get an FHA loan with student debt

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Let’s say an FHA mortgage sounds like a good choice to you, but you’re afraid you won’t be able to qualify for it due to student debt. Here are a few steps to improve your eligibility.

You can explore refinancing student loan debt into a new private loan with a lower interest rate. Student loan rates from private lenders have hit an all-time low, so swapping debt for a cheaper loan can help you pay off your balance faster and get a home.

If you’ve been paying attention to the news lately, you know that President Joe Biden is considering cancellation of at least $ 10,000 student loan debt per borrower. But keep in mind that his forgiveness – if it ever comes – will pay off federal student loans, not private ones.

If you are burdened by other types of debt, transferring your balances to low cost debt consolidation loan can be a good option for increasing your financial stability and paying much lower interest.

Also, look for other ways to cut costs and potentially save a little more on your home down payment. When your car insurance is renewed, use a website that makes it easy to compare policies and make sure you pay the lowest price

You can also add a small boost to your down payment by investing in the booming stock market, even if you don’t have a lot of money. The popular app allows you to develop a diversified portfolio using little more than “Little thing” from your everyday purchases

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