With the dramatic increase in tuition over the past decade, graduates are leaving their university with much more than a diploma – piles and piles of student loan debt. It is yet to be seen, but experts are predicting that the huge amount of debt saddling recent graduates could have an affect on the housing market and real estate sales – students just can’t afford the massive payments of a home and their college loans.
If you are a recent graduate and have piles of student loan and credit card debt but want to purchase a home, it may be a difficult task, however take into consideration the following steps and you will be able to determine when and how you can get a mortgage when you have student loan debt.
Evaluate your Debt to Income Ratio
A debt-to-income ratio is a way lenders will evaluate your ability to qualify for a mortgage. It basically gives them a window into the ability of you to repay your loan.
How Is a Debt-To-Income Ratio Calculated?
- A Lender will add up all of your monthly debt payments (mortgage, car payment, credit card payment)
- The lender will divide those payments by your gross monthly income
- The result is a percentage
- Most lenders will not approve your mortgage if your debt-to-income ratio exceeds 43%
Ways To Manage Your Student Loans
Typically car and credit card payments are fixed and can not be adjusted without refinancing the auto loan or paying down the credit card balance, however, if you have federal student loans, you may have some flexibility to get your monthly payment lowered – and this may be what you need to dip below the 43% debt-to-income ratio and afford the home you want.
Switch from a standard to graduated student loan repayment plan
A graduated plan assumes your salary will rise in the next few years which means your student loan payments will start low, but the accelerate as time goes on. It is important to note that if you opt for this plan, you need to be certain your salary will increase. If it won’t, you may be stuck with loan payments that you can not afford.
Raise Your Credit Score
Your credit score can also affect your mortgage rate and help you get a lower monthly payment. One way to get a better credit score is to make timely student loan payments.
The lender will look at your credit score to not only determine if your mortgage will be approved, but also to determine the interest rate. Borrowers with good credit scores get lower interest rates and more choices for different types of mortgages.
Stick to Federal Student Loans
If you would like to purchase a home shortly after graduating from college, try your best to stick with federal student loans. They offer the most flexible payback options and typically offer the best interest rates.