How to Buy a Home Even with Student Loan Debt

How to Buy a Home Even with Student Loan Debt

Our Dirty Little Secrets for Buying Your First Home

Buying a home for the first time can be confusing. That’s why the tips and strategies you’ll find in our 8-week series will set you on the right path. It’s our own unique approach and a “behind the scenes” glimpse of what you should look out for and consider when starting your own search for a home.

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

You’re not alone.

Many first-time buyers are worried that their large student debt takes them out of the game when buying a home. But, most of the time, it doesn’t! 

So, don’t automatically assume you’re facing a roadblock to homeownership if you have student loan debt, most everyone does, even people who have bought a home.

There are ways that we can work with you 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 we’ll highlight below.

We 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.

We’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 We View Student Debt

Let’s get to the basics first. When you buy a home, we consider your debt-to-income ratio or DTI.

It’s the amount of recurring debt you have monthly compared to your gross monthly income.  This is an important piece to getting pre-qualified for a mortgage – along with your credit score and cash available for down payment and closing costs.

What is the importance of calculating a debt to income ratio?

We 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. 

There is a back end ratio and a front end ratio:

• 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 debts each month. (But keep doing that too!)

How to Lower Your DTI

If you need to lower your monthly debt and obligations, you can get in touch with your student loan servicer. 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 a side job … every little bit could help you pay down credit cards and other debts.
• 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.

Chat with a Loan Officer that will help you

As I always say, there is no one size fits all when it comes to home finance. There are programs that may be geared toward borrowers just like you.

In some cases, we may consider using .5%-1% of the student loan balance to calculate your DTI. In other cases, we may be using the actual payment. That’s why it is important to get in touch with a Loan Officer early so that you can see what programs may be available to you.

There also may be state assistance programs that can help you pay off your student loan debt.  Keep in mind that some of these programs can update and change without notice, so be sure to keep me posted if you want the latest info and updates on these types of programs.

Keep Increased Loan Limits In Mind

In 2020 the Federal Housing Finance Agency raised the conforming loan limit to $510,400 and maximum of $765,600 in high-cost areas. Now it can be easier for many buyers to qualify for conforming loans backed by Freddie Mac and Fannie Mae. This means you can take advantage of lower down payments options at higher price points. 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 launched two specific programs within its Maryland Mortgage Program (MMP).

Smart Buy 2.0 –This Maryland program gives a little bit more help to those first-time buyers who qualify for a MMP loan and also have between $1,000 and $30,000 in student loan debt (whether it’s in repayment or deferred status).

• Recipients will get $5,000 as part of down payment assistance (DPA) deferred loan with 0% interest
• Recipients will receive 15% of the sales price of their home to pay off student debt at closing (Max of $30,000). This is forgiven after 5 years of living in the home.

Read more about the Smart Buy 2.0 Program here: https://mmp.maryland.gov/Pages/SmartBuy/default.aspx

 You must complete homebuyer education. You must use an approved lender. Condo buyers will need to purchase in an approved building.

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 
• Freddie Mac HomePossible Mortgage
• VA Loan- For Buyers who have served in the military
• FHA Loan

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.

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?

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 and Planning Ahead

We are 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 give us a call and we can come up with a plan based on your timeframe.

So, don’t let student loan slow your home buying dreams come true. 

In fact, we’ve had many clients end up paying off their student loans in FULL with the equity they received from their first home purchase. Buying a home could possibly help you pay off your student loans even more quickly!  No guarantees, but we’ve known many people to have that experience!

Up next week is our final article in Our Dirty Little Secrets to Buying Your First Home series. You’ll find out why Buying a Home Is Like Falling In Love! It’s a topic you don’t want to miss.