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As interest rates continue to remain near historic lows (compare today’s lowest mortgage rates here) Many Americans dream of buying a home. But many also suffer from student loan debt. The good news is that student loan debt shouldn’t stop you from buying a home. Indeed, lenders don’t mind if you have some kind of debt, including student loans, but not too big.
How big is student loan debt if you want to buy a house?
Your Debt to Income Ratio (DTI), which compares your monthly debt to how much you earn, usually needs to be below a certain threshold to qualify for a mortgage: “Most lenders look for a DTI that is 43% or below. … If your DTI is higher, many lenders see you as a risky loan candidate and will have trouble making monthly mortgage payments, ”says Rebecca Safier, a certified student loan advisor and debt expert at the company. Student Loan Hero… Note that with some government-backed mortgages, such as FHA loans, the DTI is usually around 43%, while other lenders may look like a lower percentage.
This example from the Bureau of Consumer Finance Protection shows how calculating your personal DTI can work: if you pay $ 1,500 a month on your mortgage, another $ 100 a month on your auto loan, and $ 400 a month on the rest of your debt, your monthly debt payments are $ 2,000. If your gross monthly income is $ 6,000, then your DTI is 33%. Not all lenders calculate your DTI equally, and not all debts are always included, but this will give you a rough idea.
Should I refinance or pay off my student loans to lower my debt obligations?
If you’ve just calculated your DTI and it is over 43%, don’t worry for now: it may be possible to lower it. If you have private student loans, you may want to consider paying off balances or refinancing them to lower your monthly debt obligations, says Leslie H. Tyne, financial attorney, founder and managing director of Tayne Law Group. Here you can see the lowest student loan refinancing rates.
“When you refinance student loans, you can choose a new maturity. If you’re trying to lower your monthly payments, you can opt for a longer maturity — 10 to 20 years — but expect to pay more interest over the life of your loans, ”says Safier. This can add value to you as well, as it costs a lot more to own a home than to pay a monthly mortgage. “So if you can pay off or refinance your student loans before buying a home, you can better deal with new potential problems like a leaking roof or a broken stove,” Tyne says. Check out your student loan refinancing options here.…
“If you have federal student loans, you can try to lower your monthly payments by including them in an income-driven repayment plan. These plans usually cut your monthly payments, but they also cost you more in interest payments in the long run, so you’ll have to decide if that compromise suits you, ”says Safier.
What else do lenders look for when applying for a mortgage?ge?
Of course, lenders look at other things besides your DTI, including your credit rating, the amount of the loan you want, your down payment, and more, Tyne says. But here are the things you can deal with: When it comes to your credit rating, since the amounts owed make up a large portion of your rating, paying off the balance can help increase it. “Timely payments are also an important factor. You don’t have to pay off all your student loans to qualify for a mortgage, but it’s helpful to understand how they affect your credit and, as a result, your ability to get a mortgage, ”says Safier.
Saving up for a down payment is also more difficult when you have student loan arrears. But even if you can’t save 20%, it might be okay: look at VA loans, FHA loans, and USDA loans.
Even if you are eligible for a mortgage loan, you need to decide if it is convenient for you to carry your mortgage debt and student debt at the same time. “Perhaps buying a home means that you will be in debt for student loans longer than if you invested the money to pay them back faster. There is no one-size-fits-all answer here; When it comes to paying off debt and owning a home, you will need to consider your priorities and decide which is best. Also, you need to take a close look at your budget and make sure you can afford to pay off your mortgage and student loans at the same time, ”says Safier.
If all these calculations tire you, know that you are not alone. “If you already have a student loan and car debt, it may be difficult for you to get a home loan while keeping all debt payments at 36% of your income or less. At the same time, it is difficult to save on the down payment by paying off student loans and rents, ”says Holden Lewis, a housing and mortgage expert at the company. NerdWallet…