Many adults wrestle with student loans. Often, these debts take years or even decades to pay off. This creates a serious financial burden that can follow a person around long term.
In most cases, having student loans doesn’t prevent people from envisioning themselves as homeowners. But, many decide not to go forward fearing that student loans hurt their chances when buying a home.
Even though student loans don’t disqualify a person from purchasing a house, they do complicate matters. If you are hesitant to buy a home because of your student loans, here’s what you need to know.
Student Loans and Debt-to-Income Ratios
When mortgage lenders consider extending a loan to a borrower, they review the applicant’s debt-to-income ratio. This calculation compares a person’s gross monthly income to their debt payments, helping to determine what they can afford.
Since student loan payments often cross the hundred dollar mark, their impact on debt-to-income ratios is significant. Ultimately, this makes obtaining a loan more challenging, particularly if you have other debts.
Impact on Credit Scores
Student loans also affect most people’s credit scores in numerous ways. First, it can shift the average age of your current credit lines. If your last student loan is relatively new, your credit score can decrease since your average age on your credit lines will be shorter.
Your payment history with your student loans also plays a factor. While making payments on time can raise your scores, missed payments and delinquencies harm them. And, if you default, your credit score can come crashing down.
Mortgage lenders look to your credit score to determine if you are a reasonable risk. This means that handling your student loans properly is a must if you want to buy a home.
On a side note, deferment or forbearance don’t harm your score inherently. But, it does mean your balance isn’t shrinking, and it may be rising, which can make it harder to secure a mortgage.
Down Payment Considerations
Even if having student loans doesn’t affect a down payment directly, it can make it harder to save money. If you’re struggling to keep up with your debt payments, socking cash away for a down payment is more challenging.
Although you may be able to manage your payments, you likely have other priorities, too. For example, establishing a retirement account, paying off debt, or creating an emergency fund might outweigh your desire to gather a down payment.
While there are mortgages that require low or no down payment, these come with caveats. Often, you’ll end up having to pay for private mortgage insurance (PMI) if you don’t have 20 percent to put down. This alone can cost you hundreds of extra dollars a month.
In the end, having student loans doesn’t disqualify you from buying a house. However, it can make it more difficult.
As with every major financing decision, you need to figure out what you can afford first. Then, focus on getting a down payment equal to 20 percent of the target purchase price. This allows you to avoid PMI, making your monthly payments smaller and showing you are less of a credit risk.
Whether you have student loans or not, buying a house is a big decision. So, don’t jump in too fast. Otherwise, you may quickly end up over your head.
Ready for more from Engineer Your Finances? Here are some articles to help get you started:
- The Pros and Cons of P2P Mortgages
- Tips for Getting Great Mortgage Rates When Buying a Home
- Take Steps to Avoid These Mortgage Scams
Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals