June 29, 2018
June 29, 2018
Many people assume that student loans and a mortgage need to be compartmentalized. The general train of thought is that you should focus on paying off your student loans first, and then move on to buying a house or car. No one wants to be doubly in debt, right?
But plenty of people qualify for a mortgage while paying off student loans, and for many people, the mortgage payments are less than the cost of rent.
Beyond all that, some people just aren’t willing to wait that long to put down roots and start their adult life in earnest. So how do you put together the best case to present to a lender, and ensure you’ll be approved for your first mortgage?
Lenders want to see that you can afford to pay for a mortgage, and a down payment can help convince them that you’re a responsible borrower. Many experts recommend saving for a 20% down payment, which will eliminate any private mortgage insurance you’ll have to pay. Private mortgage insurance or PMI can cost about 1% of the total loan.
A large down payment can also help you get a lower interest rate. It may also be valuable in landing your top pick if you’re shopping in a competitive market with other qualified buyers.
However, you can often get a mortgage with a down payment as little as 3.5-5%. A lower down payment could make it easier for you to buy your home now instead of waiting until you have 20% saved – but it’s a fine line to walk.
When you apply for a mortgage, lenders check to see if you can afford to make mortgage payments on top of your other obligations. They determine that through the debt-to-income ratio, which should be 43% or less.
To find your ratio, add up all your monthly debt payments and divide it by your gross monthly income. If your ratio is too high, changing your student loans to a lower monthly payment can increase your chances of qualifying for a mortgage.
You’ll likely pay more in interest if you change your payment plan, but it may be worth it if you can save money owning a home instead of paying rent. You can also try refinancing your student loans to a lower interest rate, which can also decrease your monthly payments. Federal loans allow you to easily change your payment plan, but private loans may not have this option.
It’s not student loans that can get you disqualified for a mortgage – it’s what lenders see on a credit report. For example, if you have a history of missing payments or making late payments, that will show up on your credit report as a red flag to creditors.
You can view your credit report for free from all three credit bureaus at annualcreditreport.com. The aspects that make up a credit score are your credit utilization percentage (the amount of credit that you use versus how much you have available to you), the average age of your accounts, the types of accounts you have and your on-time payments.
If you’re about to apply for a mortgage, don’t take out a new credit card or refinance any of your loans. You don’t want any other new credit inquiries on your report, which can ding your score and make it harder to get a low interest rate.