Still Paying Off Student Loans? Can You Buy a Home? Should You?

How to Pay Student Loans While Buying a HomeWhether you are a recent grad or have been in the workforce for a few years, the reality of still paying off your student loan debts can be intimidating, if not downright scary, when you think about assuming a mortgage payment. When you feel like you’ll never be able to buy a home because of your student loans, compounding your trepidation are other debts you might have—things such as a car payment and credit cards. Most of all, for recently graduated students, you may think your student loans disqualify you from buying a home—but this is just a common misconception.

Like with anything, there are two sides to the decision to purchase a home. It all depends on your situation, your goals, and your comfort level with the choice.

We’ll first go through the pros and cons and then share the process, tools, and insights into getting a mortgage while managing your student loan debt.

Let’s address the downsides first.

Reasons Why Buying a Home in the Immediate Future Might Not Be Right for You

The thought of being “house-poor” scares and depresses you, so you’re resistant to jumping into homeownership. Perhaps you remember your parents being overwhelmed by more than a few of the hidden costs that seem to go with homeownership—most often at the worst possible times. Things like a suddenly leaking roof or an HVAC system that dies aren’t DIY projects and can be costly. Many of the more regular maintenance issues such as gutter cleaning and deck refinishing can be handled perhaps with the help of a friend or a neighborhood teen.

The thought of being “tied down” just doesn’t fit your current needs. You haven’t a clue where you want to be in 5 or 10 years; your job involves a fair bit of travel and/or career upward mobility most likely will involve relocation, or you’re considering a career move; these are all valid reasons for continuing to rent.

Reasons Why Buying a Home Might Be Best Readdressed in a Year

You want to buy a home but know you need to clear up some debt with debt repayment planning and improve your credit score. We’ve shared a number of articles on how to create a livable budget that allows you to reduce debt and save for a down payment.

The single most important element in being approved for a mortgage is your debt-to-income ratio. Debt to income is the financial lending term that describes a person's monthly debt load as compared to their monthly gross income.

It makes sense to lower your debt-to-income ratio prior to applying for a mortgage, which can be done by decreasing your debts or increasing your income. If you’ve recently married, buying a home with your partner is one way to increase your income for the purchase. While you’re lowering your debts, spend the time investigating the optimal neighborhoods in which to purchase your home, the style of home that best suits your needs, potential resale values, etc.

Paying off debt from credit cards and possibly paying off your car loan will improve your DTI substantially. Concurrently, save for a down payment, and consider refinancing your student loans if they have a high-interest rate. These are steps you will need to take prior to applying for a mortgage. 

Why You Should Buy a Home While Paying off Student Loans

When can you tell if you’re ready to buy a home without being affected by student loans? Here are a few signs. You want to buy a home and your personal, work, and financial parameters all indicate homeownership is a wise choice.

  • Your debt-to-income ratio looks good. This is particularly true in your front-end DTI is significantly less than 28%.
  • You’ve saved up a sizable down payment. You’ve been able to pay down your loans and also save enough for a 20% or higher down payment.
  • You’re making enough money to handle the costs that accompany homeownership.
  • You could get more for your money. Not only will you build equity but possibly get more for your money by buying instead of renting.
  • You have a low-interest student loan. Student loan interest rates tend to be lower than other loans, such as auto and credit cards. Student loans allow an extended repayment period. They’re also unsecured, which means that you don’t risk losing any personal collateral should you need to stop paying them for a certain time. 
  • The best example of this would be to repay $10,000 in credit card debt versus paying off the same $10,000 in student loan debt.

If you’re ready to buy a home despite student loan debt, there are a number of options first-time homebuyers can utilize. 

Good News for Home Buyers with Student Loan Debt

By and large, homeownership is beneficial for Millennials, and fortunately, the FHA (Federal Housing Authority) has issued Revised Student Loan Mortgage Qualification Guidelines.

Deciding if homeownership is right for you depends more on when than anything else, and there are always steps you can take towards buying a home. All the other steps you can plan ahead of time.

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