Can Student Loans Affect Your Ability to Buy a Home?
Getting a good education to land a solid, well-paying job with benefits is expensive and getting costlier every year. Students enrolling in a four-year institution can expect to pay at least $37,000 a year for tuition, fees, room, and board. People are put in the awkward paradox of needing a decent annual income just to get the education for a job with a decent annual income. Since scholarships and grants are restricted and can only go so far, student loans are a popular alternative for college financing. Used wisely alongside careful budgeting, student loans could help college students establish a respectable credit history. The repayment of student loans may result in long-term benefits or consequences for borrowers.
Building Credit with Student Loans
All money lent to a person may be reported on their credit reports. Some debts show up on all three reports from the three credit reporting agencies, while others report to only one or two. This explains some of the differences between reports. Fortunately, student loans can be a good way to build a credit history. Potential lenders hope to see an applicant with a varied credit history, which can be harder to prove in young adulthood. Someone who has never purchased a car or put debt on a credit card can build a credit history with regular repayment of their student loans.
Since student loans are often a long-term debt for borrowers, they can allow people to establish years of good credit. On-time payment of debt is a significant portion of a person's credit score, so a debt that's paid in at least the minimum prior to the due date each month sets them up for future success. Depending on the type of student loans, borrowers may be able to negotiate some terms of the loan, including the minimum monthly payment. This allows people to ensure a higher likelihood of compliance in repayment of the student loans.
Minimizing Negative Credit Impacts from Student Loans
As with any debt, what gets reported to the credit reporting agencies has a notable effect on credit score and overall creditworthiness. On-time payments look good, but one or two late payments or missed payments have the potential to negate a year or more of on-time payments. Underemployment can be a common cause of missed payments, and a lower-paying job can turn the minimum student loan payment into an impossible situation. In this case, it's typically better to look for alternatives to missing payments as part of your debt-repayment strategy, such as:
- Payment deferment or forbearance (granted based on need)
- Debt consolidation under a single monthly payment
- Extension of the repayment plan
- Graduated payments intended to rise with future income
Access to these programs depends on the type of loan and whether it's a private loan or one guaranteed by the federal government. Defaulting on student loans can also affect a borrower's ability to defer or restructure payments. If you're able to plan in advance, you might refinancing your student loans for a better rate, as well.
Getting a Mortgage While Managing Student Loan Debt
Besides affecting credit score, student loans could alter a mortgage applicant's ability to buy the home they want. While credit scores are partially based on debt to available credit, mortgage qualifications often follow strict guidelines about monthly debt obligations in relation to income. Many lenders limit the total amount of debt to an applicant's income to 43 percent of gross income, including the mortgage payment itself. Other lenders may set the limit even lower to 36 percent of gross income. The lower the monthly non-mortgage debt, the higher the mortgage amount applicants could receive. People with higher monthly debts may only qualify for a smaller mortgage amount, as a result.
Restrictions on debt-to-income may encourage borrowers to consider the monthly payments they make on student loans each month, and how it might affect the price of the house they can afford to buy. Interest rates on student loans carry a lot of weight on the monthly payment, and private loans tend to have higher interest rates than federal student loans. As such, it may make sense to look at options to cut down on the student loan monthly payment to qualify to buy a better home.
With the way that college expenses have risen in the past 15 years, managing student loans is something that young adults have had to face much more than their parents. Starting a career path with a lot of debt can be frustrating when previous generations didn't have to. The good news is that with a solid plan to repay student loans, people can tackle their debts and build a good financial future at the same time. Soon enough, you may find yourself in a good position in a good position to buy a home with student loans.
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