Do you fall into the category of recent college graduate?
By today’s standards, recent can mean anything from one to, say, five years. Maybe even more. But you went to college, took out student loans and are now thinking about buying a house. Currently, many millennials who recently graduated from college have, on average, just under $40,000 in loans. And that’s before graduate school.
That amount of debt is definitely enough to deter many of these millennials from even considering applying for another loan. As for a home loan? That’s a new loan… And a sizable down payment. While budgeting for student loan payments, saving up for a down payment can sometimes be a bit of a stretch.
Sure it’s a little scary. But regardless of the amount of debt you have post-graduation, you cannot necessarily allow it to deter you from buying the house of your dreams.
No matter how beautiful or perfect the house, do not throw rationality to the wind.
Debt is still debt.
And it is important to recognize how that plays a factor in you obtaining a mortgage.
The debt-to-income ratio
Let’s discuss your debt-to-income ratio (DTI). Even if you’ve never heard of that term before, what you’re thinking is most likely spot-on. Your DTI is the percentage of your monthly income you spend on debt. Whether your monthly income is $3,500 or $10,000, the amount of money you dedicate to “debt” each month will factor heavily on your eligibility for a mortgage.
As for what is considered debt… Mortgages, student loans, car loans, minimum credit card payments. Any and all of these different forms of “debt” will factor into your DTI.
Breaking it down: you make $30,000 a year, $2,500 a month. You have a $350 student loan payment, $250 car payment and a $100 minimum credit card payment. Your DTI is 28%.
This ratio is used by lenders to determine your ability to manage your current monthly payments, while still able to make your monthly mortgage payments. According to Consumer Finance, an ideal DTI is at 33%. Evidence has shown that borrowers with a higher DTI is more likely to find it difficult to make their monthly mortgage payments. At the higher end of the scale, 45% DTI is considered a standard cap. However, with good credit or an additional down payment, a higher DTI may be considered.
So, you have student loans. You’re looking for a house. And you’re looking for a little advice. There are a few different options.
First, it is essential to manage your loans (and your other debts) appropriately. You have the ability to adjust your student loan payments from “standard” to “graduated.” A graduated payment plan adjusts your monthly payment, starting low and gradually increasing as time goes on. Hence, graduated repayment. Another alternative? Income-based payments. This payment plan can, depending on your income, can reduce your monthly payments and, thus, reduce your DTI.
Another option, reduce your debt before searching for that perfect home. Whether it is paying off your credit card bill entirely or making a significant dent in your student loans, reducing your overall debt can make you eligible for a mortgage.
Finally, you can look into FHA loans. These are mortgages that are insured by the Federal Housing Administration. With this type of mortgage, borrowers are required to pay for mortgage insurance, which provides security for the lender. Essentially, if you have a lower credit score, or even a high DTI, qualifying for a FHA loan allows for the opportunity to purchase a home in, even with a sub-prime financial situation.
Regardless of the category you fall into, the best advice we have for you is to come speak with one of our agents. Every situation is unique, so speaking with someone directly will allow us to find the loan option that is best. For you!
By Natasha Mason