By Paul McCoy, CIMA®, AIF®
Graduating from college and buying a home are two classic components of the American dream. But the reality is, many Americans are faced wondering if their student debt will keep them from ever owning a house. At of the end of 2018, the outstanding student loan debt in America reached an all-time high of $1.46 trillion.1 But while student loan debt means you have some important considerations to make before attending an open house, it doesn’t necessarily mean you can’t buy a home. Below are a few important tips to help you buy a home while managing student loan debt.
Tip #1: Focus On Your Credit Score
While you can't magically change how much student debt you’re currently facing, you can focus instead on optimizing your credit score. Your credit score can is an important factor in helping banks and lenders decide whether or not you’re eligible to receive a loan. It’s one of the pieces of information lenders collect as they assess your entire financial picture. The most common credit score scale ranges between 300 and 850, with anything above 700 considered good and any score above 800 considered excellent.2 Not only can having a good credit score help you secure a loan, it can also affect the interest rates of that loan. In some cases, the higher your credit score, the lower the interest rate.
Tip #2: Evaluate Your Debt-To-Income Ratio
Surprisingly enough, it’s not always the amount of debt you have that can affect whether or not you’ll receive a loan. Instead, it’s the ratio of how much debt you have to how much income you receive. Find out what percentage of your income goes toward paying off debt (credit card debt, car payments, student loans, etc.) to determine your debt-to-income ratio. As you might expect, the lower the percentage, the better a chance you have at receiving a mortgage. And, as simple as it sounds, there are really only two ways to lower your debt-to-income ratio: lower your monthly debt or raise your monthly income.
Tip #3: Monitor Your Credit Utilization
Another important factor you have control over that lenders often consider is your credit utilization. If you’re looking to buy a home, you’ll want to work on keeping your credit utilization low. Credit utilization is the percentage of your credit limit that you spend every month. For example, if your credit limit is $4,000 and you spend $2,000, you’ve utilized 50 percent. Ideally, lenders like to see you using 30 percent or less of your credit limit. Here are a few ways to help keep your credit utilization low:
Pay off credit card debt multiple times a month
Inquire about raising your credit card limit
Set up a credit utilization alert with your provider
Tip #4: Consider Seeking Pre-Approval
If you’re perusing open houses before securing a mortgage, you could be putting the cart before the horse. Getting pre-approved by a lender before looking at homes can actually help you understand how much you will realistically be able to spend. Nobody wants to fall in love with their dream home only to find out they can’t secure the funds for it.
Tip #5: Explore Assistance Programs
The good news is, when it comes to buying a home - you’re not alone. There are programs out there to help certain home buyers afford a down payment, even if they have student debt. Some of the most common programs include federal loans through the Federal Housing Authority (FHA), USDA loans for those looking to buy a home in rural areas and VA loans for veterans. Depending on your unique circumstances, you could be looking at low down payment options or even no down payment at all.
Just because you’re stuck paying back student loan debt doesn’t mean you can’t take on a mortgage. Instead of focusing on how much you owe, work instead to lower your debt ratios and optimize your financial standings where you can. This can help lenders see you as a responsible, money-savvy lendee who is ready to handle homeownership.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.