Can I Buy a Home If I Have Student Loan Debt? | Ranger student loan
With current mortgage rates at historic lows, you may want to consider buying a home soon if you’re ready to take this step. But if you have student loan debt, you might be wondering if it could affect your ability to get a good mortgage or even buy a home. While it is true that too much existing debt is likely to affect your interest rate and even if you qualify for a mortgage, in most cases you can – and should – still consider buying a home. if you are ready.
Student loans don’t affect your ability to get a mortgage any differently than other types of debt you can have, including car loans and credit card debt. When you apply for a mortgage, your lender will assess all of your existing monthly payment obligations, including student loans, to determine if you would be able to handle the additional monthly payment. Depending on your situation, the lender will decide if you qualify for the new loan and, if so, at what interest rate.
For this reason, you should consider how your monthly student loan payment and a hypothetical mortgage payment might affect your debt ratio and your overall credit rating before applying for a mortgage. In other words, if you have any existing debt, you need to be careful that you can handle all of your monthly payment obligations with your current income.
This calculation varies a bit depending on the type of mortgage you choose.
Potential buyers can choose between a conventional mortgage from a private lender, such as a bank or other financial institution, or an FHA loan, which is a mortgage backed and insured by the Federal Housing Administration for people with limited savings or a lower credit rating. This support allows the lender to give you a better deal, which usually includes a lower minimum down payment and easier credit eligibility. Recent changes to the way lenders calculate monthly student loan payments may make the FHA loan a more attractive option for those with student loan debt, especially first-time home buyers.
When considering your options, here are some things you need to know about your debt-to-income ratio and your credit rating.
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When you apply for a home loan, lenders use your debt-to-income ratio as a measure to assess whether you would be able to manage all of your debts and make your monthly payments on the new loan.
The lender calculates your debt-to-income ratio by adding up all of your existing monthly debt payments and your expected mortgage amount. This number is then divided by your gross monthly income, or the amount you earn before taxes and other deductions, to determine what your debt-to-income ratio would be.
You can do this calculation before you apply for a mortgage to better understand if you qualify. For example, if you were paying $ 500 per month for your car loan, $ 200 per month for your student loans, and you wanted to buy a house that would have a monthly mortgage payment of $ 1,300, your monthly debt payments would total $ 2,000. . If your gross monthly income is $ 6,000, your debt-to-income ratio is about 33% based on the $ 2,000 figure.
For the purposes of this calculation, debt payments are regular payments that you are required to make to repay the money you borrowed. They include student loans, auto loans, credit card debt, and mortgages, for example. Other monthly expenses, such as utilities and grocery bills, are not included in this calculation.
Most lenders will not approve a mortgage if the applicant’s debt-to-income ratio exceeds 43%. Ideally, it should be 36% or less, with a maximum for monthly mortgage payments of less than 28%, experts say.
The bottom line is that how much you pay each month is what counts in this calculation, not your overall debt amount. If you find that your debt-to-income ratio is too high to qualify for the mortgage you’re looking for, note that federal student loans offer some flexibility in how much you pay each month. For example, you can try to change your student loan repayment plan from standard to progressive or extended to see if the lower payment reduces your debt-to-income ratio.
Just keep in mind that reducing your monthly student loan payment could increase the amount you will pay over time if you pay off the loan over a longer period and accumulate more. interest.
For those considering an FHA loan, changes were announced in June 2021 that affect how student loan debt is calculated in the debt-to-income ratio and allow some potential buyers with student loan debt to access more. easily to FHA loans. Under the old guidelines, FHA lenders were required to calculate a borrower’s monthly student loan payment at 1% of the outstanding student loan balance. Under the new policy, the monthly payment amount used in calculating the debt-to-income ratio is the same as a potential buyer’s actual student loan payment, which is often lower.
According to the FHA, approved lenders can implement these changes immediately, but must do so by August 16, 2021.
Existing debt, including student loans, can also affect your ability to qualify for a mortgage, as lenders also look at your credit score. You build credit and improve your credit score by regularly making your existing monthly payments on time, including student loan payments.
Lenders use your credit score and history to assess the level of risk they would take in granting you a loan. A high credit score with no credit record payment defaults Where default values gives lenders confidence that you will pay off your new loan on time, while a low credit score with a history of late or inconsistent payments can make the lender more hesitant.
Lenders use your credit score to determine if you qualify for a mortgage, as well as to determine the interest rate on the loan. Borrowers with higher credit scores are generally eligible for lower interest rates, while interest rates increase for borrowers with lower credit scores.
You can check your credit score before applying for a mortgage through your bank or at AnnualCreditReport.com, which is overseen by the Federal Trade Commission and the Consumer Financial Protection Bureau. If your credit rating is low, making regular student loan payments on time is a great way to build and improve your credit, and get a mortgage – with a good interest rate.
A low credit score could be another reason to consider an FHA loan. FHA loans are available for people with a credit score as low as 500 if they are able to afford a 10% down payment. However, if you have experienced bankruptcy, at least two years must have passed and you must demonstrate that you are working towards establishing good credit.
With an FHA loan, a low credit score will always affect the interest rate you are offered, so you could end up paying a higher rate on your mortgage. Also, keep in mind that if you are behind on your federal student loans, you probably won’t qualify for an FHA loan.