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How Do Student Loans Impact My Ability to Get A Mortgage?

Approximately 45 million Americans carry student loan debt — or about 1 in 5 US adults. While the White House was making moves to cancel a portion of the $1.76 trillion owed, that relief plan hasn’t come to fruition yet.

Federal data shows that people ages 35-49 owe more than $600 billion, and this burden can have a significant impact on their ability to qualify for a mortgage. 

When lenders evaluate a borrower’s creditworthiness, they take many factors into consideration, including their credit score, debt-to-income ratio, employment history, and other financial obligations. Student loans are considered a type of debt that can affect all of these factors, making it more difficult for hopeful homeowners to qualify for a mortgage.

But don’t give up your dreams of buying a house of your own and creating a safe and secure space for yourself and your family. The right lender can help you explore your options and find the best path so you can start building equity and generational wealth. 

Read on to learn more about how student loans can affect your plans, and what you can do to overcome this challenge and realize your dream of owning a home

All about the numbers

If you’ve decided that you’re sick of renting and dealing with landlords and leases and you want to buy a house, the first thing you should do is take an honest look at your financial situation. 

One of the key factors in getting approved for a mortgage is your credit score. Typically, if you have a lot of debt or a history of not paying your bills on time, your score will be lower. But if you’ve fulfilled your obligations and made payments on time, student loans can contribute to a robust bill-paying history, which actually raises your score. 

If you don’t know what your credit rating is, it’s easy to go online and find out. Your banking institution or credit card company will sometimes display it as part of your profile, or you can visit AnnualCreditReport.com. It’s important to review this report carefully for mistakes and errors and dispute incorrect info as soon as possible.

A good credit score is anywhere from 670 and up; 850 is the highest (FICO score) you can go. If yours is not so hot, you can take steps now to improve it. Setting up automatic payments for your monthly bills is a great way to start. 

You may also want to consider speaking to a debt counselor, a financial advisor, or a trusted mentor about the best strategy for paying down your debts, starting with the ones that have the highest interest rates. 

Check your student loan paperwork to see what your current interest rate is. If you’ve been participating in an income-based repayment plan, it’s important to adjust your payments as you earn a higher income, or you could actually be digging yourself into a deeper hole. 

For conventional mortgages, realistically you’ll need a credit score of at least 620 or higher to qualify. The better it is, the lower your interest rate could be, which can save you thousands of dollars. 

However, other types of home loans, FHA for example, have more flexible requirements and are designed to give more Americans access to funding and the opportunity to become a homeowner. 

Additional opportunities

Many Millennial consumers are giving up on the idea of buying a home due to poor credit scores and student loan debt, but they may not be aware of all of their financing options. 

It’s also common to think that you need an enormous down payment or a lot of ready cash on hand. For conventional lenders, you will need to have at least 3 to 5% of the total purchase price for your down payment. Don’t forget that there are programs available for first-time buyers, funded by both the state and federal governments. 

You should definitely speak with an experienced lender who’s familiar with a variety of loan products, and be sure to explore whether an FHA (Federal Housing Administration) mortgage could be the perfect solution to your needs. 

These loans are backed by the federal government as well, present a lower risk for lenders, and offer a financing option that’s accessible to more consumers. FHA mortgages let you put down as little as 3.5% and have a credit score as low as 580 (and down to 500, with a bigger down-payment.)

In 2021, the Biden administration made it easier for borrowers with student debt to qualify for a single-family home loan, especially those who were paying via income-driven repayment plans or forbearance agreements. This change could lower your DTI and help you qualify for a larger loan amount, so hopeful borrowers need to be careful not to bite off more than they can chew.

It’s critical to ensure you have adequate cash flow to pay your mortgage payment and other bills, including student loans, on time every month. Keep in mind that there are also additional costs to owning a home over renting, such as property taxes, maintenance, and insurance. 

Owning property might not be for everyone, but if it’s one of your goals, I can help. Partnering with a knowledgeable mortgage broker can make all the difference and enable you to buy the home you’ve always wanted. Let’s talk about the possibilities — reach out today!

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