Are your student loans squelching your dreams of home ownership? Do you wonder if you’ll ever be able to stop renting and have a place you can truly call yours? Or maybe you own a small house but your family needs a larger one.
How Student Loans Affect Qualifying for a Mortgage
A student loan is debt, and a mortgage lender needs to know how much you pay every month on your debt. In that sense it’s no different from a car loan or a credit card balance. The kicker is that student loans tend to be large. According to US News, about 65 percent of recent college graduates borrowed to get through, and their average student loan debt is over $30,000. Some owe less, but many owe more.
What Impacts Your Ability to Get a Loan
Your lender wants to be confident that you’ll be able to make your mortgage payments. Two of the main factors that determine that ability are your credit score and your debt-to-income ratio, or DTI.
You need to have an acceptable credit score to get a mortgage at all. There are lending programs where you can qualify without having a top-notch score. However, the higher you score, the better terms you can get. That means a lower down payment, a better interest rate, and possibly a lower monthly payment.
Your bank and some credit card issuers will tell you what your score is. If you’re wondering what makes up that number that’s so important to your borrowing ability, here are the components.
- Payment history. The best indicator of whether you’ll make future payments is whether you’ve made payments in the past. Late and missing payments hurt this part of the score.
- Used credit vs available credit. If you have a lot of cards that are “maxed out,” it damages your score.
- Credit mix. Different types of credit are mortgage, auto loans, student loans, credit cards. Lenders like to see that you successfully handle different types of debt.
- New credit. It can hurt your score if you’ve opened several accounts recently.
- Length of credit history. A long history of paying accounts helps.
Your DTI answers the question, what percentage of your monthly earnings goes to pay debt? It doesn’t consider other expenses such as utility bills and groceries. It does include auto loans, credit card payments, your student loan and the mortgage payment you’ll be taking on. If you make $5,000 a month, before taxes and deductions, and your debt payments, including the mortgage, total $2,000, then your DTI is 40 percent.
The maximum qualifying DTI is around 43 percent. 36 percent or below is better and will get you better terms. Your monthly mortgage payment ought to be 28 percent of income or less.
How Can You Improve Your Chances To Qualify?
The best way to keep your credit score high is to consistently make all payments on time, including your student loan.
It’s good to calculate your expected DTI before you apply with a lender. If it’s too high, you might be able to modify your student loan and make a lower monthly payment. Just remember that will lengthen your loan and increase the total number of dollars you will pay over time.
Even with Student Loans, Consider Buying a Home
A student loan is debt, and like any other debt it can be managed. Home ownership is both personally and financially rewarding, and you should look into it even if you’re still paying off student loans. If you’re still not sure, talk to us here at Mid-America Mortgage. We can help you sort through the factors that go into a home purchase decision.