Buying a home is one of the most significant milestones in our lives and a decision that will reward you in years to come. However, if you have student loan debt, it could seem like a milestone you may never reach. Right now, managing student debt alongside a mortgage might seem like an impossible feat — but with a little clever research and a smart strategy, it’s totally possible to become a proud homeowner while comfortably paying off your student debt.
Here’s everything you need to know about buying a home while you still have college debt:
Let’s start with your credit score
If you’re considering buying, the first step is to know your score. When it comes to checking your credit health, home financers usually turn to FICO credit scores, which range from 350-800. If your score is below 600, many lenders will consider your credit subpar and refuse a loan application based on this info alone.
However, if you need to, improve your score by keeping up with your student loan repayments every month. Also, try avoiding opening new lines of credit, and managing any other credit you have in the same manner. If your credit is already in tip-top shape, preserve it by avoiding missed or late payments, or carrying a sizable credit balance.
Live by the 28/36 rule
Many people consider buying a house without a true understanding of how much owning a home really costs. And how much they can realistically afford. Fortunately, there’s a good rule of thumb you can use to make a home purchase with your eyes wide open.
It’s called the 28/36 rule, and it’s simple to understand and follow:
- No more than 28% of your gross monthly income should go towards your household expenses.
- No more than 36% of your gross monthly income should go towards your total debts, including mortgage, car payments, student loans, etc. This is also known as your debt-to-income ratio (more about this next).
To apply this to yourself, take your gross (pre-tax) monthly income, then subtract any credit bills you pay each month (such as a $90 student loan payment). Next, calculate 36% of that figure. That’s the maximum amount you should spend on a mortgage payment (ideally, you’ll spend less).
Put simply, your debt-to-income (DTI) ratio is your total monthly debt divided by your gross monthly income. This figure allows lenders to measure your ability to manage monthly mortgage payments. While your DTI may go up and down over time, it gives the lender a snapshot of your current financial position and whether or not you can comfortably cover the ongoing costs of owning a home.
The rule of thumb for borrowers to qualify for a loan is to keep your debt-to-income ratio below 43%. One of the quickest ways you can improve your chances of being accepted for a mortgage is to reduce your debt-to-income ratio by either reducing your debt or increasing your income. If you can’t afford to increase payments on your debts, it might be time to ask for a raise or look for another job that pays more. Another option is to enroll in an income-based repayment plan. These plans allow you to reduce your monthly student loan payments so that they align better with your current income.
Get help with down payments
Paying off a student loan might mean you aren’t able to save enough money for a down payment. The good news is that there are several programs that can assist you with not only the down payment but also the closing costs on your home loan, too. For example, a down payment grant does not need to be repaid and is interest-free. To qualify for these programs, you may need to be a first-time buyer, complete a homebuyer education course, or have an income below a certain threshold. Look for programs in your local area.
Look for financing alternatives and ease the burden
It can seem impossible to imagine juggling a student loan while also owning a house. The good news is that buying with cash or a mortgage are no longer the only options. One new way to purchase a home is with a co-investing model, like Haus. Co-investing offers a more affordable, flexible way that allows you to comfortably manage your student loans. When you buy with a co-investor, you share some of your home equity when you sell, and in exchange, you get much lower monthly payments, up to 30% less than with a traditional mortgage.
If you’re saddled with student debt, the good news is that you’re not relegated to renting. With a little financial prep and some research on new ways to buy, you can put yourself in the position to purchase a home in the new year — all without compromising your journey to financial freedom.