How To Buy A Home Even With Student Loan Debt

How To Buy A Home Even With Student Loan Debt

Anything you think is in your way can be removed if you really want to be a homeowner.  In fact, you’ll find out that some commonly perceived roadblocks are only myths, and don’t need to delay your dreams anymore. If you are hesitant about moving forward, our new 5-week series is just for you — The 5 Most Common Myths BUSTED About the Best Time to Buy Your First Home.

Myth:  I can’t buy a home; I have too much student loan debt.

Truth: You can buy a home even with student loan debt and there are even special types of loans available that help people with student loan debt. Let’s find out how!

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Is student loan debt holding you back from being a homeowner?

You’re not alone.

Many first time homebuyers feel the pinch when it comes to buying a home, which can explain why the percentage of first-time buyers who tend to be in this age group has dropped in the last couple of years.

Having a monthly $200 to $300 student loan payment does mean that there’s less money toward saving for a down payment, less for a future mortgage payment, and ultimately the less home you can afford.  Plus, the cost of living in the DMV doesn’t help when you’re young and still early in your career.

However, don’t automatically assume you’re facing a roadblock to homeownership if you have this debt.

There are ways that we can help you through programs and a financial plan to make your first home purchase a reality — and even more affordable despite your student loans.  The “Smart Buy 2.0” program in Maryland is one I’ll highlight below.

I understand that you may be grappling about whether you should pay off your student loan debt first before you even purchase a home. That could be an option but don’t make it your only one.

I’ve got some other options for you to consider so you don’t have to delay years until becoming a homeowner, especially if you have substantial student loans.

And always remember to please consult with your own financial advisor to determine what is best for your situation.

How Loan Officers Look at Student Debt

Let’s get to the basics first. When you buy a home, a loan officer will look at your debt-to-income ratio or DTI.

It’s the amount of recurring debt you have monthly compared to your gross monthly income. 

Why?

A loan officer needs to consider your recurring debt — such as a car loan, credit card payments AND your student loan(s) — in order to determine if you can afford more debt with a monthly mortgage payment. 

And that’s where your student loan debt combined with a mortgage can tip the scales in the DTI ratio, pushing it higher and ultimately affecting your ability to get pre-qualified by a lender.

The DTI can vary depending on the loan program you use, but it can range between 35-55%.

Your debt obligations can easily grow when you do have a student loan plus car payments and credit card bills. (It’s not unusual at all!) That’s why loan officers will carefully look at your income and assets to verify your ability to pay back the loan when you have a higher DTI.

This higher DTI may make not be something that you are personally comfortable with. Keep in mind your lifestyle does not get included in your DTI. Remember that what a loan officer says you can qualify for can be much higher than what you are comfortable spending each month!

That is why it is super important to consider your personal budget and what you feel comfortable spending each month before you even speak with a loan officer. Let’s look at an example using a 28/36 DTI.

• The 36% is the back-end ratio and equals your entire monthly housing costs expenses (principal, interest, mortgage insurance, property taxes) plus other debts (student loan, car loan, credit cards, etc) divided by your gross monthly income. It’s the DTI we explained above, and you don’t want to go above 36%.
• The 28% is part of the front-end ratio equals your monthly housing expenses (principal, interest, mortgage insurance, property taxes) divided by your gross monthly income. Your other recurring debt is not included.

Keep in mind, the DTI has nothing to do with your credit score or how well you pay back your debt. It’s looking at the amount of debt obligation you currently have when compared to your income. Not whether you’ve been good at paying your student loan and other debt each month. (But keep doing that too!)

And that’s why it can be frustrating for many first-time buyers with student loan debt who have good credit scores.

How to Lower Your Debt To Income Ratio (DTI):

If you need to lower your monthly debt and obligations, start with your student loan(s). Here are some options to consider. Remember to always consult with your own financial advisor before pursuing.

• Graduated repayment plan – payments start low and rise every two years as your income should rise.
• Loan consolidation – if you have more than one student loan, combine them into one with a lower interest rate.
• Lengthen your payback term – spread out your loan repayment over more years to lower your monthly obligation. This will increase you long-term interest payments so carefully way the pros and cons of this strategy.

Examine all of your financial obligations and find other ways to lower you DTI:

• Consider bumping up your monthly income with a side job or asking for a raise … every little bit could help your cash flow and savings. 
• Don’t buy a car and use public transit to eliminate a recurring car loan debt.
• See if you can negotiate a lower minimum monthly repayment requirement on your credit cards, especially one that is on the higher side. Some credit card companies are willing to work with you if you have a good credit score and payment history.

If you have student loan debt, we can work with you to see what programs are available in your situation. The programs below may help jump start your ability to make home ownership a reality.

Increased Loan Limits Can Help

The Federal Housing Finance Agency raised the conforming loan limits to a maximum of $765,600 in high-cost areas such as the DC metro area in 2019. Now it can be easier for many buyers to qualify for conforming loans backed by Freddie Mac and Fannie Mae. This means many buyers won’t need to qualify for a jumbo loan, which requires a larger down payment. This is good news for those of you with student loan debt and constrained cash flow. 

Tapping into Federal Loan Programs

There are several government programs that offer loans to borrowers with student loans. Each has different requirements and may not be a good option for you. However, one may make your homeownership dreams comes true.

• Fannie Mae HomeReady Mortgage  — allows up to a 50% DTI and 3% down payment.
• Freddie Mac HomePossible Mortgage — allows up to a 50% DTI and 3% down payment.
• VA Loan Guaranty – Buyers who have served in the military can qualify for a loan with 100% financing. They can be a bit more flexible when it comes to DTI.
• FHA Loan – Technically allows a 55% DTI but is considered on a case-by-case basis.

Maryland Programs Tackle Student Debt —

The state of Maryland is making an effort to help potential homebuyers who have student loan debt. They’ve have two specific programs within its Maryland Mortgage Program (MMP).

SmartBuy Program https://mmp.maryland.gov/Pages/SmartBuy/default.aspx

• Recipients will get $5,000 as part of down payment assistance (DPA) deferred loan with 0% interest, and
• You must complete homebuyer education. You must use an approved lender. Condo buyers will need to purchase in a FHA or Fannie Mae-approved building.
• This program will pay off any outstanding balance on a borrower’s student loan at the time of the home purchase with certain restrictions. You must have a minimum of $1,000 student loan debt and up to a maximum of 15% of the home’s purchase price up to $40,000.
• First mortgage will finance up to 95% of the sales price. A second mortgage will be a forgivable loan to pay off the student loan balance. A third mortgage can be in the form of a down payment assistance 0% deferred loan.
• You must live in the house for at least 5 years to have your student debt forgiven.

For more information on other loan programs within the Maryland Mortgage Program that can help you make homeownership more affordable, visit its website here. (link) https://mmp.maryland.gov/Pages/About-CDA.aspx.

Getting Assistance in Virginia

The state of Virginia doesn’t have a specific program geared toward student loan debt like Maryland. However, there are some local and state assistance programs that can make home-buying more affordable for first-time buyers, many of whom have student loan debt. 

If you want to see what steps you need to take in order to make home ownership possible (even with student loan debt), we are here to help!