If you’re ready to purchase your first home, but you’re worried your student loan debt may be holding you back, we’re here to help! Although it’s true that having too much debt will affect your interest rate and whether you can qualify for a mortgage, in most cases you can still consider buying a home if you’re ready to.
Your debt-to-income ratio is the percentage of your gross monthly income that goes towards paying your monthly debt payments. This can include car payments, credit card payments, and yes, student loan payments. When you apply for a mortgage, your lender will calculate your debt-to-income ratio to determine your ability to make monthly mortgage payments. This is done by adding all of your existing monthly debt payments and expected mortgage amount. This total is then divided by your gross monthly income to provide them with your debt-to-income ratio.
You can do this yourself before applying if you feel your monthly student loan payments may cause your debt-to-income ratio to be too high. For example, let’s say you pay $350 a month for your student loans, $500 for your car loans, and you’re looking at a house that would have a monthly mortgage payment of $1400. Your total monthly payments would total $2,250. If your gross monthly income is $5,000, then your debt-to-income ratio would be roughly 45%.
Your debt-to-income ratio should be under 36%, with no more than 28% of that going towards your monthly mortgage payments. This is one way to determine if your student loans could prohibit you from qualifying for a home loan.
Student loans, as well as other debts, can affect your credit score. This in turn does make a difference in the likelihood you’ll be approved for a mortgage. When you make your monthly debt payments on time, your credit score will improve. However, the opposite happens if you have missed payments, or frequently make your payments after their due date.
Lenders will look at your credit score to determine how much they can trust you to make monthly mortgage payments on time. Along with this, if you have a higher credit score, you’ll typically qualify for lower interest rates. Be sure to take a look at your credit score before you apply for a mortgage, so you can have an idea of what your lender will be dealing with. Typically, a good credit score would be anywhere from 670-739.
If your student loan payments are high, or you feel they may keep you from qualifying for a conventional loan, we highly recommend considering an FHA loan. Credit scores as low as 580 may be accepted for an FHA loan, so if you check your score and it’s not where you’d like it to be, we highly recommend asking us about qualifying for this loan. FHA loans are easier to qualify for than conventional loans, and you can put down as little as 3.5% for fixed-rate loans.
Overall, having student loans will not keep you from qualifying for a home loan. It depends on your total debt-to-income ratio, and credit score. If you have any questions, or want to see if you’re eligible for an FHA loan, contact Team Crescenzo today!