Here’s How To Buy A House When You Have Student Loan Debt

So, can you buy your dream house if you have student loan debt?

The common wisdom is bleak: student loans are preventing borrowers everywhere from living The American Dream.

It doesn’t have to be that way, however.

Here are 8 ways to maximize your chance of buying your dream home — even if you have student loan debt.

Student Loan Debt Statistics

If you have student loan debt, you’re not alone. There are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt, according to personal finance site Make Lemonade.

The same student loan debt statistics report also found that:

Nearly 2.2 million student loan borrowers have a student loan balance of at least $100,000.
There is $31 billion of student loan debt that is 90 or more days overdue.
There is nearly $850 billion of student loan debt outstanding for borrowers age 40 or younger.
With student loan debt statistics like these, it’s no wonder some think it’s impossible to own a home when you are burdened with student loan debt.

Not so.

Here are 8 steps you can take right now:

1. Focus on your credit score

FICO credit scores are among the most frequently used credit scores, and range from 350-800 (the higher, the better). A consumer with a credit score of 750 or higher is considered to have excellent credit, while a consumer with a credit score below 600 is considered to have poor credit.

To qualify for a mortgage and get a low mortgage rate, your credit score matters.

Each credit bureau collects information on your credit history and develops a credit score that lenders use to assess your riskiness as a borrower. If you find an error, you should report it to the credit bureau immediately so that it can be corrected.

2. Manage your debt-to-income ratio

Many lenders evaluate your debt-to-income ratio when making credit decisions, which could impact the interest rate you receive.

A debt-to-income ratio is your monthly debt payments as a percentage of your monthly income. Lenders focus on this ratio to determine whether you have enough excess cash to cover your living expenses plus your debt obligations.

Since a debt-to-income ratio has two components (debt and income), the best way to lower your debt-to-income ratio is to: repay existing debt;
earn more income; or do both.

3. Pay attention to your payments

Simply put, lenders want to lend to financially responsible borrowers.

Your payment history is one of the largest components of your credit score. To ensure on-time payments, set up autopay for all your accounts so the funds are directly debited each month.

FICO scores are weighted more heavily by recent payments so your future matters more than your past.

In particular, make sure to:

Pay off the balance if you have a delinquent payment
Don’t skip any payments
Make all payments on time

4. Get pre-approved for a mortgage

Too many people find their home and then get a mortgage.

Switch it.

Get pre-approved with a lender first. Then, you’ll know how much home you can afford.

To get pre-approved, lenders will look at your income, assets, credit profile and employment, among other documents.

5. Keep credit utilization low

Lenders also evaluate your credit card utilization, or your monthly credit card spending as a percentage of your credit limit.

Ideally, your credit utilization should be less than 30%. If you can keep it less than 10%, even better.

For example, if you have a $10,000 credit limit on your credit card and spent $3,000 this month, your credit utilization is 30%.

Here are some ways to manage your credit card utilization:

set up automatic balance alerts to monitor credit utilization
ask your lender to raise your credit limit (this may involve a hard credit pull so check with your lender first)
pay off your balance multiple times a month to reduce your credit utilization

6. Look for down payment assistance

There are various types of down payment assistance, even if you have student loans.

Here are a few:

FHA loans – federal loan through the Federal Housing Authority
USDA loans – zero down mortgages for rural and suburban homeowners
VA loans – if military service
There are federal, state and local assistance programs as well so be on the look out.

7. Consolidate credit card debt with a personal loan

Option 1: pay off your credit card balance before applying for a mortgage.

Option 2: if that’s not possible, consolidate your credit card debt into a single personal loan at a lower interest rate than your current credit card interest rate.

A personal loan therefore can save you interest expense over the repayment term, which is typically 3-7 years depending on your lender.

A personal loan also can improve your credit score because a personal loan is an installment loan, carries a fixed repayment term. Credit cards, however, are revolving loans and have no fixed repayment term. Therefore, when you swap credit card debt for a personal loan, you can lower your credit utilization and also diversify your debt types.

8. Refinance your student loans

When lenders look at your debt-to-income ratio, they are also looking at your monthly student loan payments.

The most effective way to lower your monthly payments is through student loan refinancing. With a lower interest rate, you can signal to lenders that you are on track to pay off student loans faster. There are student loan refinance lenders who offer interest rates as low as 2.50% – 3.00%, which is substantially lower than federal student loans and in-school private loan interest rates.

Each lender has its own eligibility requirements and underwriting criteria, which may include your credit profile, minimum income, debt-to-income and monthly free cash flow.

Student loan refinancing works with federal student loans, private student loans or both.

If you make these 8 moves, you’ll be better positioned to manage your student loans and still buy your dream home.

Zach Friedman, Forbes

Five First-Time Home Buying Mistakes to Avoid

Thinking about buying your first home? Before you can unlock the door to homeownership, you have to take some important first steps including:

Getting approved for a mortgage.
Choosing the right real estate agent.
Finding the right home that fits your budget.
Here are five common mistakes first-time homebuyers should avoid.

1. More to it than mortgage payments

Many first-time homebuyers decide to buy when they feel ready for a mortgage. But just because they can afford the mortgage payments doesn’t mean they can afford to own a home, says New York attorney Rafael Castellanos, president of Expert Title Insurance.

“They have an idea of what their mortgage payment is going to be, but they don’t realize there’s much more to it,” he says.

Property insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs that first-time homebuyers tend to overlook when shopping for a place.

“Keep in mind property taxes and insurance have a tendency of going up every year,” Castellanos says. “Even if you can afford it now, ask yourself if you’ll be able to afford the increased costs later.”

2. Looking for a home first and a loan later

Homebuying doesn’t begin with home searching. It begins with a mortgage prequalification — unless you’re lucky to have enough money to pay cash for your first house.

Often, first-time homebuyers “are afraid to get prequalified,” says Steve Anderson, a broker and owner at Re/Max Benchmark Realty in Las Vegas. They fear the lender may tell them they don’t qualify for a mortgage or they qualify for a loan smaller than expected. “So they pick a price range out of the sky and say, ‘Let’s go look for a house,’” Anderson says.

And that’s not how it should be done. Yes, it’s more fun to go look at houses than to sit in a lender’s office where you have to expose your financial situation. But that’s a backward approach, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Illinois.

“You get preapproved, and then you find a home,” he says. “That way, you’ll make a financial decision versus an emotional decision.”

3. Not getting professional help

New to the homebuying game? You’ll need a reputable real estate agent, a good loan officer or broker, and perhaps a lawyer.

Venturing into this process alone, without professional help, is not a good idea. While every rule has its exception, generally, first-time homebuyers should not try to deal directly with the listing agent, Anderson says.

“If you are getting divorced, are you going to go to your husband’s attorney for help? Of course not,” he says. “Same here. If you go to a listing agent, they are only going to show you their listings. You must find a buyer’s agent to help you.”

If you hire an agent without a referral from friends or family, ask the agent to provide references from previous buyers. The same goes for loan officers or mortgage brokers.

“It’s very hard for first-time homebuyers because they don’t know who they are dealing with,” Anderson says.

It’s crucial to find a professional who will give you “truly independent advice,” Conarchy says. Sometimes that means hiring a lawyer.

Shop today for the best mortgage deal.

4. Using up savings on the down payment

Spending all or most of their savings on the down payment and closing costs is one of the biggest mistakes first-time homebuyers make, Conarchy says.

“Some people scrape all their money together to make the 20 percent down payment so they don’t have to pay for mortgage insurance, but they are picking the wrong poison because they are left with no savings at all,” he says.

Homebuyers who put 20 percent or more down don’t have to pay for mortgage insurance when getting a conventional mortgage. That’s usually translated into substantial savings on the monthly mortgage payment. But it’s not worth the risk of living on the edge, Conarchy says.

“I’d take paying for mortgage insurance any day over not having money for rainy days,” he says. “Everyone — especially homeowners — needs to have a rainy-day fund.”

Need a mortgage but don’t have much of a down payment? Search today for a low-down-payment mortgage.

5. Getting new loans before the deal is closed

You have prequalified for a loan. You’ve found the house you want. The contract is signed and the closing is in 30 days. Don’t celebrate by financing another big purchase.

Lenders pull credit reports before the closing to make sure the borrower’s financial situation has not changed since the loan was approved. Any new loans on your credit report can jeopardize the closing.

Buyers, especially first-timers, often learn this lesson the hard way.

“They sign the contract and they want to go buy new furniture for the house or a new car,” Anderson says. “I remember one case where, just before closing, the buyer drove to the office and said, ‘Look at my brand-new car.’ I told them, ‘You’d better go back to that dealership.’”

Luckily, the dealership agreed to wait a couple of days to report the loan to the credit bureaus, he says. Otherwise, it could have killed the deal.

~Polyana da Costa, Bankrate

Five Steps to Take Before Buying a Home

When you’re considering buying your first home, you’re probably full of excitement about achieving the American dream. Unfortunately, this dream could turn into a nightmare if you haven’t made sure that you’re financially ready for the costs of becoming a homeowner. Before you call a realtor, take these five steps to get all your ducks in a row.

1. Calculate what you can comfortably spend

The last thing you want to do is make yourself “house poor” by spending more of your income on a home purchase than you should. The “affordability standard” for housing is that you should spend no more than 30% of your income on housing costs (including insurance and property taxes), while many mortgage lenders prefer that your housing cost is no greater than 28% of your income.

Your outstanding debts can also impact the amount you can spend on a home. Most lenders want a total debt-to-income ratio — including your mortgage payments and other debts — to be around 36% or less, although you can still get a standard mortgage with a ratio as high as 43%.

This means if your income is $50,000, you could reasonably afford about $1,170 per month for your total housing costs if you stuck to the 28% rule — assuming you didn’t have a substantial amount of other debt that would push your total monthly payments above the recommended 36% of income. If we also assume you can pay 20% down and qualify for an interest rate of 4%, then you could potentially afford a home price of up to $250,000. That may or may not be a realistic price in your area, and you may want to aim lower if you have other sizable debts.

2. Save a down payment of 20%

In our example above, we factored in having a 20% down payment when calculating the price of the home you could afford. Paying at least 20% of the value of the home up front is vital, because it allows you to avoid private mortgage insurance (PMI). PMI insures your lender in the event that you’re unable to make payments and the lender must foreclose on you. On a $200,000 loan, PMI could cost you $100 a month or more, depending on how much you paid up front — and you could be paying it for several years.

You’re stuck with PMI until you pay your loan down to 78% or less of the home’s original value. Once you prove to your lender that you’ve reached that milestone, your lender is required to drop the PMI requirement. .

If you don’t have a down payment, not only will you waste thousands of dollars on PMI and additional interest payments, but you’ll also put yourself at substantial risk. When you make a 20% down payment on a home, the value of the house would have to fall more than 20% for the home to be worth less than you owe on it. If you only make a tiny down payment, however, even a slight downturn in the market could mean you’re underwater — i.e., your home is worth less than you still owe the bank. This makes it difficult or impossible to sell unless you can bring cash to the real estate closing for the difference between what your house sells for and what you still owe.

3. Save an emergency fund of three to six months’ worth of living expenses

When you’re a homeowner, you are responsible for everything that goes wrong in your house. Instead of calling a landlord when the furnace breaks or the pipes freeze, you have to call — and pay for — a repair man. If the problems are costly to fix, or can’t be fixed, you’re the one on the hook. If you don’t have money set aside to cover maintenance, repairs, and replacements, then you’ll have to use credit. You don’t want to be paying interest on your new fridge for the next 10 years, so make sure you have an emergency fund to cover the many costs of being a homeowner.

Not only can an emergency fund help you pay for surprise repairs, but it can also ensure that you don’t lose your home in the event that an illness, job loss, or other crisis puts a major strain on your household finances. If you cannot pay your mortgage because your income has taken a hit, you could be foreclosed on, lose your house, and end up with ruined credit. You don’t want this to happen, so save up enough money to pay the mortgage for several months in case something goes wrong.

4. Get pre-approved for a mortgage loan

When you have your financial house in order, it’s time to prove to the bank that you’re ready for the responsibility of taking on a mortgage. You want to get pre-approved by your chosen financial institution before you start shopping for a home. Getting pre-approved means you’ll have a clear idea of what the bank will lend you so you don’t shop outside of your price range. You’ll also be taken much more seriously by real estate agents and any potential sellers to whom you make an offer. Some sellers won’t even consider offers from someone who isn’t pre-approved, because there’s no way to know whether the financing will be available to complete the sale.

If you want your bids to be competitive and you want to know you’re shopping for houses that are priced right, provide your financial information to the bank before you start house shopping and get a pre-approval letter to take with you.

5. Find a buyer’s agent

Although you can technically buy a house without an agent, it’s usually a bad idea to try it — especially if it’s your first home. An agent can help you spot red flags that should send you running away from a prospective home. Agents know the market and can help you make a reasonable offer so you don’t overpay, and they can also guide you through the steps of the buying process, like getting a home inspection.

You’ll want to be sure you find a buyer’s agent, rather than letting the seller’s agent represent both you and the seller. A buyer’s agent is focused only on your interests and has lots of experience helping homebuyers find the house of their dreams. If you’ve already made sure you’re financially ready before calling a realtor, your agent can help you make the buying process low-stress and successful.

~Motley Fool

Six Ways to Rustle Up a Down Payment for a Home

The down payment. It’s the only thing keeping you from a home of your own. You’ve got a good job, you’re paying down debt, and mortgage rates are still remarkably low. And rental rates are getting ridiculous.

Let’s see if we can break down this home buying barrier.

It doesn’t always take 20% down

If you’re a first-time home buyer, the down payment hurdle you have to clear may be quite a bit lower than you think. Traditionally, lenders have preferred 20% down, but a lot of low down payment options are available, especially to first-time buyers.

Mortgages guaranteed by the Federal Housing Administration, Department of Veterans Affairs or Agriculture Department can be go-to low down payment loans. In fact, mortgages backed by the VA and the USDA — for those who qualify — usually don’t require a down payment at all. A funding fee is charged on VA loans, but even that can be rolled into your monthly loan payment.

You could get an FHA-backed loan with as little as 3.5% down, but you’d have to pay mortgage insurance to help lenders defray the costs of loans that default.

Conventional loans, which aren’t backed by the government, also offer low down payment programs to first-time buyers. Down payments of just 3% are common. Some lenders will offer 0% down loans. Mortgage insurance will enter the picture here, too.

However, a lower down payment usually means you’ll pay a higher interest rate.

Crowdfunding a down payment

Crowdfunding is the ultimate dream for snagging sudden money from strangers, other than the lottery. It can be done, but there are some catches.

First, you’re not going to get this done on Kickstarter; personal fundraising isn’t allowed there. Sites like GoFundMe are best suited for hard-luck appeals like medical expenses for life-threatening diseases, so it’s unlikely you’ll get a lot of help there when you’re pitching to raise money for a mortgage down payment. But who knows?

FeatherTheNest.com might be an option to consider. It lets you build an online profile for a gift registry where contributions to your down payment can be funneled into a linked bank account. The service seems particularly suited for engaged couples and newlyweds. The transaction fees are pretty stout, though — totaling about 8% on each donation.

Family down payment gifts and loans

Getting help from family members might be another way to go.

Garrett Clayton, CEO of AmCap Mortgage in Houston, cautions that receiving a gift toward a down payment takes a “full circle” of documentation to satisfy a mortgage lender’s requirements. The donors will have to verify in writing not only that they made the gift but that they have the financial ability to make such a donation. That will require them to provide bank statements as proof, along with a letter confirming that the donation is a gift and not a loan.

“From a lender perspective, if it is something that will be required to be paid back, then we would need to take those terms of repayment into the calculation of the borrower’s [debt-to-income] ratio, to make sure they still qualify,” Clayton says.

However, while properly documented gifts are acceptable to lenders, you might not want to rely exclusively on the kindness of family members, he adds.

“We see that borrowers that have none of their own money in the transaction are way more likely to default on loans,” Clayton says. “I would much rather do a loan to a 600 FICO client that has 100% of their own down payment, versus a 780 client that is getting 100% [of their down payment as a] gift.”

State and local down payment assistance

Here’s a little-known source of down payment help: state and local assistance programs. Rob Chrane, CEO of Atlanta-based DownPaymentResource.com, says the service has identified close to 2,500 initiatives across the nation.

There are programs in every state, implemented by government agencies, nonprofits, foundations and even employers. Assistance can have a geographic focus as wide as the nation or as narrow as a city — all the way to hyperlocal initiatives targeted as tightly as neighborhoods, and even house by house.

Programs change often; they’re funded, defunded and sometimes funded again.

Often, it’s a matter of matching a property to a program, Chrane says, based on a home’s location and price. Assistance requirements typically set a maximum sale price for a county or other geographic definition. Obviously, these programs aren’t meant to help borrowers buy million-dollar homes or vacation properties, he says.

“There’s typically some maximum household income limit,” Chrane adds. That can vary by location, as well as the number of members in a household, he says. Even statewide programs will have income requirements that are often higher in metropolitan areas and lower in rural areas.

A 2016 study by Attom Data Solutions determined that the typical down payment assistance program benefit, calculated over the life of a loan, was $17,000. The total combined an average savings of nearly $6,000 on the down payment with over $11,000 in monthly house payment savings over the life of a loan.

Benefits can be layered. Chrane says users of the website who were eligible for assistance qualified for an average of eight programs last year.

“There are some myths and misperceptions around this,” Chrane says. “Sometimes people think, ‘Oh, this is only for really low-cost housing, in targeted census tracts, distressed neighborhoods…and very low-income households. It’s much more widely available than that.”

Tapping retirement accounts

If you have a retirement nest egg, you might be tempted to tap a portion of it to help with the down payment. Employer-sponsored 401(k) plans often allow for penalty-free hardship withdrawals or loans. But if you’re under 59½, you’ll pay income taxes and a 10% penalty on the withdrawal. And loans can trigger an immediate repayment — or taxes and a penalty — if you lose your job.

IRA withdrawals for home purchases are allowed, up to $10,000. Roth withdrawals are tax-free and without penalty if you’ve had the account for at least five years. Tapping a traditional IRA will trigger income taxes.

The most obvious strategy
There’s always the spend-less-than-you-earn-and-save-it strategy to building a down payment fund. Maybe a few savings tips can help you there.

More than likely, it may take a combination of strategies to get you into a home with a decent down payment — and still have a little left over to cover those unexpected homeownership expenses.

~Hal Bundrick, NerdWallet

Student Loans and Home Buying

If you’re still paying off your student loans, does it make sense to buy a house before you’ve paid off your debt?

“Getting into a home can be a good way to build savings and to pay yourself rather than paying someone else for the cost of your housing,” says Matt Ribe, senior director of legislative affairs and corporate secretary for the National Foundation for Credit Counseling. “[But] given the interest rates that are typically associated with student loans, it’s not unreasonable to want to prioritize paying those when you’re just starting out.”

The bottom line? Limit your debt to what you can afford to pay. Here are some questions to ask yourself before making this important decision:

What’s the Interest Rate on Your Student Loans?

“Typically, subsidized government loans are in the 6.5 – 7% range,” says Ribe. “Private loans can be even higher. Even with refinanced loans, you’d be extremely lucky to get less than 5%.” The higher your interest rate, the greater your incentive to pay off your loans before you buy a home.

Are You Making Progress on Paying Down Your Loans?

“It’s possible with some of the income-driven student loan repayment plans to achieve a very low monthly payment,” Ribe says. “But if that payment is not covering the amount of interest that’s accruing every month, then you’re not making progress on repaying your student loan, which means you may have longer-term affordability issues. Don’t conflate your [lower] monthly student loan payment with room in your budget without doing a more thorough analysis.”

What’s Your Debt-to-Income Ratio?

To qualify for a mortgage, your debt-to-income ratio (DTI) should be less than 43%, but many experts recommend it be no higher than 36%. The lower your DTI, the lower the stress of monthly payments.

If your DTI exceeds 43%, focus on paying down your student loans and other debt before pursuing homeownership. “Credit card balances typically have the highest interest rates,” Ribe says, “so we certainly advocate paying those down first.”

Do you have a rainy-day fund?

Experts recommend you have at least three to six months’ worth of expenses put aside in the event of an emergency. As a homeowner, you’ll also want savings to cover inevitable repairs.

“The total cost of a home is much greater than your monthly payment,” says Ribe. “There are some maintenance and homeownership costs, mortgage insurance, property taxes, etc. … so make sure you have some money set aside after you cover your down payment to take care of those types of contingencies.”

If your monthly student loan payments are standing in the way of your ability to build a hefty rainy-day fund, consider holding off on a home purchase until your cash reserves can adequately cover repairs and other emergencies.

Are You Contributing to Your Retirement?

Purchasing a house may be a personal goal and may even be a good investment, but don’t let it completely replace your retirement savings. If your employer is matching your contribution, at a minimum you should be contributing at least as much as your employer match annually to ensure you aren’t leaving free money on the table.

Remember that contributions to your retirement account in your 20s provide far higher returns than those made in your 40s. That said, once you’ve covered your employer match, it may make sense for you to buy a home or pay off high-interest student loans instead of investing more in your retirement account. That will depend on your income, tax bracket, investment returns and other personal factors.

How’s Your Credit Score?

The best mortgage rates go to buyers with excellent credit scores (above 740). But if your score is below 680, you may be better off waiting to buy a home until you have a chance to improve it.

Paying your student loans on time each month and never missing payments helps you earn a better credit score. Student loans also add to your credit mix of installment and revolving loans, which can have a small beneficial impact on your credit score, according to FICO.

When you pay off your student loans in full, it helps lower your DTI, but your credit score may dip slightly if you don’t have another installment loan in good standing on the books. In this scenario, to keep a good mix of credit after your loans are paid off, you might consider applying for credit in the form of a mortgage – if your financial circumstances allow. If not, focus on paying down your other debt and getting your credit utilization below 30% on each account.

Can You Get a Good Mortgage Rate?

Usually, getting the most favorable mortgage terms requires 20% down, but not always. “There are a number of first-time homebuyer mortgage products that are attractive in terms of being able to purchase a home with a low down payment at a good rate,” says Ribe. Just make sure you plan to stay in the home long enough to build some equity.

If you can’t get a good mortgage rate, your focus should be on paying down your student loans and shrinking your DTI. This could increase your chances of getting a better rate when you finally apply for a home loan.

Do You Plan to Live in the Home for the Foreseeable Future?

The longer you plan to own a home, the greater your chances of building equity. If you aren’t quite sure where you want to settle down or envision a job transfer out of the area, for example, it may be best to wait.

“Anything less than five years, you’re going to want to rethink your options,” Ribe says. So, if there’s a pretty good chance you’ll move soon, focus on paying off your student loans.

In the end, choosing whether to pay off your student loans before buying a house is both a financial and personal decision. “There’s no one-size solution that fits everyone, so I encourage people thinking about this to speak with an expert counselor,” advises Ribe. You can find a counselor through the National Foundation for Credit Counseling website.

~Mary Purcell