If you’re like the majority of college graduates from the last decade, you still have a substantial amount of student loan debt. Homeownership rates for millennials are dropping, and even Gen X and Baby Boomers are encountering boundaries in their pursuits of home ownership. Lenders typically consider student loan debt in a borrower’s total debt-to-income (DTI) ratio, which indicates how likely it is that borrowers will be able to dictate their arranged and agreed upon mortgage payments.
While it’s objective that student loan debt negatively impacts a mortgage borrower’s options and rates, there are resources and actions that borrowers can take. There are numerous steps that student loan borrowers can take before they begin their mortgage application process that help them take back the agency to negotiate in their pursuit of a mortgage.
If you have student loan debt and want some mortgage options, first, there are many factors you must consider and address- you’ll need to maximize your options and odds for a mortgage plan that will fit your budget by planning ahead. If you don’t address these elements prior to or during your mortgage application process, you may find yourself subject to loan denials, high interest rates, or mortgage repayment plans that are far too high for your budget. Consider the following:
Student Loan Payment History
The payment history on your student loans will be reflected on your credit score, if you fall behind on your monthly payments, or continually defer your loans, expect your score to continually drop. Considering this, in the months (or years) before you start to apply for a mortgage, you must get your student loan payments back on a set and consistent payment schedule. Refinancing your loan may be a viable option if your monthly rates are too high for your budget; most loan providers offer services with on-staff loan officers to assist you with this process. If your payment history is starting to trend in a negative direction, open the lines of communication with your loan provider to collaborate on a mutually beneficial repayment plan.
If the bulk of your debts are federal student loans, you may be able to apply for an Income-Driven Repayment Plan through the US Dept. of Education; this is a very viable option if you’ve fallen behind on loan repayments due to a discrepancy in a monthly payment being too high when compared to your income- an income driven plan would be much more considerate of your monthly financial obligations if your original repayment plan is too high to be sustainable to pay regularly.
The next thing you’ll need to consider before you even consider the pursuit of a mortgage is your credit score. Even if you’ve been able to keep clear of pitfalls like high interest credit cards which will no doubt affect your credit, even maintaining large amounts of financial debt with perfect timely repayments will still negatively impact your credit score. So it’s recommended that you begin a practice of monitoring your own credit score, and ensuring your numbers are ideally anywhere between 670-800 before you begin your application process. If you need a resource, many banks offer a credit monitoring service, it would be best to use the recommended service by your preferred bank to monitor your score- some of which can send you automated updates weekly for free.
Savings, Debt repayment, and considering your goals
It’s essential that you begin saving as soon as you can for a substantial amount of time for a large down payment. Those with student loan debt, even with strong credit, should expect a minimum down payment of 5% of the total cost of the property. These rates can increase with more debt, poor credit scores, and lower incomes. Consider the current prices of the types of properties you’re interested in, account for the average percentage, and begin a saving regimen accordingly. It may be advisable to “oversave” if your loan debts are fairly large. Think of it this way: the larger your down payment, the smaller amount you’ll have to borrow for your mortgage.
While saving, it may also be important to consider what options are for more inexpensive properties if you need to buy a home sooner than later- or, you could try to monitor the homebuyer’s market trends, and wait for a window to start your mortgage application process once the market has a period of improvement for homebuyers. Waiting is always a viable option, as you can continually save while you allow your savings and credit to age and improve, while you wait for a better time to execute your home buying plans.
Assessing Total Loan Debt
Upon reviewing your Credit Score and your Savings, you may want to review the totals of your current loan debt; if the total amount of money you make annually is almost the same as the amount of money you still owe in student loan debts, it may be best to pay down your debt to a more manageable level before applying for a house. Ideally, a good rule of thumb is that it’s better for your total yearly income to be a larger amount than your total debts. But even if that’s not feasible, there are still more options.
Maximize your Options with a Mortgage Broker
Though it may sound more direct and simple to use a Loan Officer through a bank to finance your mortgage, your options will be extremely limited, and based only on the factors they consider to determine your quotes. Adversely, a broker can advocate and negotiate with multiple sources for you, and can take your student loan debt (and other financial variables) into consideration throughout the entire application process. Instead of providing a flat mortgage rate that you can’t negotiate with, a broker will provide you with options to find options that will fit within your budget.
Fees add up for those with tight budgets, as well. There are numerous fees that can be added onto the mortgage application that can be identified and negotiated with a broker, as well. A mortgage broker makes the mortgage application a guided and collaborative process, as opposed to a transactional interaction that a retail mortgage provider would provide. Give yourself the most options possible; there may be brokers’ fees for their service, but on the backend of what they can save and provide for you, their services pay dividends- especially if you’re managing student loan debt.
The Best Options are in Your Hands
This is the most important element to consider in the pursuit of a mortgage while juggling substantial student loan debt; your options depend mostly on the steps you take to improve your own finances before the mortgage application process even begins. In short, take all the steps as soon as you can to get in decent financial standing- this means savings, total debts, payment schedules, and credit scores all need to be in good standing. From there, a broker can help you navigate through the mortgage process, especially if you haven’t fully been able to wrangle your finances. A Broker can help you find options, but your mortgage rates, applications, and viability for approvals lie solely with you!