If you are like the average college graduate, you have more than $35,000 in student loan debt. That amounts to large payments and a lot of interest. Will you ever be able to afford or qualify for a mortgage with this debt in the way?
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In reality, student loan debt shouldn’t get in your way of buying a home. Lenders look at the big picture, which means they don’t disqualify you for a mortgage just because you have student loan debt. Learn what you should do to ensure that you can get a mortgage even with student loan debt.
Improve Your Credit Score
Do you even know what your credit score is right now? What about your credit history? There are two ways that you can see what your credit says about you:
- Access your credit score with your bank or credit card companies. Many companies offer free monthly access to your credit score. This won’t be the exact score mortgage lenders see, but it will be close and it could give you an idea of where you stand.
- Access your credit reports from each of the three credit bureaus
here. This will help you see exactly what lenders see when they pull your credit. If there are negative items on your credit report, you will want to fix them. Keep reading to learn how.
Now that you know what your credit looks like, it may be time to do some repairs:
- Bring your accounts current – If you have any late payments, get your bills current and continue to pay them on time
- Lower your credit card balances – Lenders and credit bureaus like to see your credit utilization rate at less than 30%. This means that you shouldn’t have more than 30% of any credit card limit outstanding at one time.
- Mix up your credit – Don’t have all credit cards or all installment loans. You want a good mixture of both, with on-time payments of course.
- Don’ close old accounts – Even if you have credit cards you have not touched in years, leave them open. If you close old accounts, you make the age of your credit lower, which can decrease your credit score.
Lower Your Debt Ratio
Your student loan debt will likely take up a good portion of your income. It’s best if you minimize the other debt to make sure that you don’t have a high debt ratio.
The average lender likes to see debt ratios at 28/36. This means your housing payment shouldn’t exceed 28% of your gross monthly income and your total debts shouldn’t exceed 36% of your gross monthly income. Of course, there are loan programs that have slightly more flexible guidelines, such as FHA loans that allow 31/43.
If your student loan debt takes up a good portion of your income, you’ll want to make sure you don’t have credit card debts or other installment debts that make your DTI too high. If you can’t pay any debt off right now, you may have to figure out a way to increase your income. A few ways include:
- Part-time job – You can work a part-time job for 1 to 2 years and have the income included in your DTI
- Side gig – You can also freelance and make extra money that you can use to either pay down your debts or qualify you for the loan with the debts included. You will need to run this side gig for at least 2 years and provide ample proof of the income in order to use it for qualifying though.
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Consolidate Your Debt
If you find that you just have too much debt, you may want to consolidate it into one loan. Before you refinance your student loans, make sure you have exhausted all options to help you lower your payment. Once you refinance student loans, you can’t get any help from the federal government.
You can choose to include your student loans or exclude them and just refinance your other debts into one loan. This way you have one payment, one interest rate, and hopefully a lower debt ratio that will help you qualify for a loan.
Consider Government-Backed Financing
If your debt ratio is an issue, it may be hard to qualify for conventional financing. You may, however, qualify for an FHA, VA, or USDA loan. The FHA loan as we discussed above, has forgiving debt ratio guidelines and it only requires a down payment of 3.5%.
If you are a veteran of the military, you can get 100% financing from the VA. They also allow a total debt ratio of 43%. Finally, if you buy in a rural area, according to the USDA guidelines, you can borrow 100% of the purchase price and you’ll only need to meet a 29/41 debt ratio guideline.
It’s not impossible to get a mortgage when you have student loan debt, but it can make it more difficult to get approved. Use these tips to help make your loan application as attractive as possible so that you can buy the home of your dreams.
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