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 you don’t need to delay your dreams anymore. If you are hesitant about moving forward, my new 5-week series is just for you — The 5 Most Common Home-Buying Myths BUSTED.

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 for first time home buyers that help you pay off student loan debt with a home purchase. Let’s find out how!

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

You’re not alone.

Many millennials are feeling 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.

Having a monthly $200 to $300 student loan payment does mean that there’s less money for a down payment, less for a future mortgage payment, and ultimately less of a home you can afford.  Plus, the cost of living in the DC metro area 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 we can work with you and inform you on assistance programs to make your first home purchase a reality — and even more affordable despite your student loans.  

I understand that you may be trying to decide 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.

You may not have to delay years until becoming a homeowner, especially if you have student loans. You’ll learn about some options that could help you make homeownership happen much sooner than you think!

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

How Lenders Look at Student Debt

Let’s get to the basics first. When you buy a home, a we 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.  DTI is different from your credit score or how much money you have for a down payment.

Why is this important?

We need 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.

The DTI allowed depends on your loan program but tends to range somewhere between 41-55%. Your debt obligations can easily grow when you do have a student loan plus car payments and credit card bills. (It’s not usual at all!)

Be careful not to overextend yourself. Remember that what you can qualify for can be much higher than what you are comfortable spending each month!

Let’s take a deeper look at the front end ratio and back end ratio that are considered for your home purchase –

• The back-end ratio 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.
• 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, your 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 DTI

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

• Income based/driven payment plan – payments are adjusted based on income and family size.
• 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 … every little bit could help your cash flow and ability to pay off other debts, like credit cards.
• 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 other monthly obligations. Many will be willing to work with you if you have a good credit score and payment history.

Start the Conversation Early

When you have student loan debt, the best thing you can do is talk to a Loan Officer early. We will be able to tell you what your debt to income ratios are and the best plan for you to qualify for a home.

As we said above, DTI is just one piece that is viewed to determine your ability to repay the mortgage, so we would need to review your whole financial picture in order to put a plan in place for you.

Your college or graduate degree is worth something and it should continue to advance your career and your earnings. These programs below will help jump start your ability to make homeownership a reality.

Increased 2022 Loan Limits Can Help

The Federal Housing Finance Agency raised conforming loan limits for 2022. The new conforming loan limit is $647,200 in most housing markets, an increase of $98,950 compared to 2021’s limit of $548,250. And for higher-cost areas, the conforming loan limit will be raised to a maximum of $970,800.

These increased loan limits make it 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 often requires a larger down payment. This is good news for those of you with student loan debt and constrained cash flow.  

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 one specific programs within its Maryland Mortgage Program (MMP).

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

• 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 between $1,000 and $30,000 in student loan debt. This program will payoff a maximum of 15% of the home’s purchase price.
• 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 for $5,000.
• 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. 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. 

Contact us for a complete list of these programs, including grants from the Virginia Housing Development Authority for down payment and closing cost assistance. You can also visit its website for additional information here. https://www.vhda.com/Homebuyers/Pages/homebuyers.aspx

Are You Ready?

Evaluate if you’re truly ready to be a homeowner even though you have student loans to pay back. Homeownership is both a big financial and lifestyle commitment.

You may already be handling sizeable monthly housing costs because of the higher rents in the DC metro area.  You may be ready to invest that money in your own home and not a rental.

Honestly answer questions about yourself. Do you have a good job with steady income with expectations of more earning power? Do you plan to remain in the area for the next 5 years minimum? Have you been paying back your student loans each month and have some money saved? Is your DTI not too high and you’re willing to find an assistance program that could help?

As a first-time buyer with student debt, you may need to lower your expectations for your first home, maybe change locations or buy a townhome instead of a single-family house. 

Focus on getting your first home and clear that hurdle. If you do it right the first time and aren’t house poor, you’ll be able to move up to your next home in later years.

You invested in your education and it took time to get your degree and start your career. It’s almost the same with becoming a homeowner. It takes time but your first home can lead to your next and so on as you get more financially secure.

Questions? I am here to help you determine if homeownership is right for you now or in the near future. It does take some planning even if you don’t have student loans, so email us at kurrleteam@firsthome.com and we can come up with a plan based on your timeframe.