Buying A House With Student Loans; The Survival Guide

You have graduated college and managed to get and keep a solid job. You are interested in putting down roots including buying a house. Alas! You look at the statement about how much student loan debt you have accumulated and you wonder if home ownership is really in your future.

Debt Ratio

Lenders look at a number of items when deciding whether or not you are a good risk for a mortgage. A major factor is the ratio of debt to income. To calculate this you total all your monthly payments including auto loans, credit card minimums, student loans, etc. Then you divide that number by your gross monthly income. That is the full amount before taxes and withholding are removed. Then you have a percentage. If that number is higher than 35 or 36%, you will probably be declined.

Risk Factors

Financial institutions and lenders also look at other factors. They will see how many late payments are recorded or how many are missed. The theory is that if you have a poor payment record with someone else, you will likely be a bad risk for a mortgage. Late payments will remain on your credit score for seven years. If you set up auto payments, this will help keep you on track. You really need to monitor your checking account to be sure there is enough money when those auto payments come due.

They will also view your employment record for stability. They will see if you have moved from job to job. Generally a two-year stint is a minimum qualification.

Keep tabs on your credit score and FICO. Specifically look for errors. If a debt has been cleared but not reflected on the report, get it resolved promptly. It is also possible that some other person’s record is getting mixed into yours.

Another place to look is your credit utilization, or how much available credit is left on each card. If you have a credit card with a credit limit of $2,000 but you only have used $200, this is good. It is important to look at all the cards and see what the overall percentage of used credit is. If you can keep that percentage under 30%, the lender will realize that you are able to manage your money pretty well.

Develop a Plan

This doesn’t mean you have to give up all hope for a home of your own.  It just means you need to do some strategic planning. 

• Loan consolidation – The U. S. Department of Education has a program that will let you move all your various student loans into a single lender.  This does not mean you will pay less interest.  It only lets you have all your student debt in one place.  It makes it easier to make a single monthly payment and keep it timely.

Private loans can be refinanced.  Check with your bank or online lenders to see what you can negotiate.  Don’t refi if the new interest rate is the same or higher than you are currently paying.

• Earn more – I know it sounds easier than it is.  Consider a part-time job.  First check with your current employer.  Most have rules about how a second job cannot interfere with your current work.  There can also be restrictions about using the skills that you use for this job on a new side job. 

Look into online freelancing services.  There are a number of sites that have significant possibilities.  Don’t discount seasonal work like lawn mowing and snow removal.

• Spend less – Again, not always easy.  Eat out less.  It’s okay to go out with friends but take advantage of happy hour rates and limit yourself to two drinks.  Forgo that vacation or new car.  Ask yourself whether you would rather be bored and boring for a couple of years and come away with a home of your own, or not.

• Check with Human Resources to see if your company offers loan debt repayment as part of their benefits package. 

Any of this extra money you are able to squirrel away can go toward paying down your student loans, paying off credit card debt, and saving for a down payment.

Getting Close

As you get your finances in good order, it is also a good idea to explore your options for lenders. There are first-time home buyer programs that you need to look into. There are some opportunities that are directed toward teachers, law enforcement, fire fighters and similar occupations. Do some online searches to see if you qualify.

Check out different mortgage types. Besides a conventional mortgage, there is the U. S. Federal Housing Administration (FHA), Veterans Administration (VA), Agriculture Department, Fannie Mae and Freddie Mac, all that have low down payment requirements around only 3%. There are also some grants available.

Fannie Mae offers a program called HomeReady. This is geared to low and moderate-income buyers and is more forgiving of lower credit scores. It is also flexible about family members paying part of the tab. There is another program called Home Possible that deals with non-traditional income sources.

Final Thoughts

The short answer is, yes. Outstanding student loan debt will affect your ability to secure a home mortgage. As you can tell, student loans are only a portion of what a lender looks at when deciding whether or not you are a good risk.

Do what you can to eliminate as much debt as possible. This will improve your credit scores as well as give you some discretionary money to apply toward a down payment. Investigate the best type of loan for you. See what each offers and the criteria you will need to meet.

Check out online lenders like LendingArch.com. You may discover possibilities you didn’t know you had. The application process is easy and they have access to a great number of lending and financial institutions to help you on your way to homeownership.