The role student loans play in denying would-be buyers from getting into a home of their own has grown to staggering levels. According to the 2018 Homebuyer Profile report from the National Association of Realtors®, “Almost one in four homebuyers this year had student loans, which made it harder for them to save for a down payment and delayed their purchase,” said USA Today.
“Among buyers rejected for a mortgage from a lender, 40 percent had college debt, the NAR found.” Per the same study, 80 percent of millennials don’t own a home, and 83% of those non-homeowners said student loan debt was a barrier to buying.
The NAR found that “Two in five buyers, like Jodi Meyers, cut out luxury or nonessential items to save up for a home,” said USA Today. Her family, in the midst of paying off Meyers’ $55,000 in student debt, cut out all necessities and purchased outside of their preferred area to be able to afford a $249,000, four-bedroom home in Lakeland, Florida. The upshot: “It’s not my dream home, but it got my foot in the door, and now I’m building equity,” she told them.
Of course, compromise is nothing new when it comes to buying a home, especially if it’s your first. Few of us can go out there and purchase the waterfront mansion of our dreams, but that doesn’t mean we don’t aspire to do so someday from our starter home in the ‘burbs.
Check out a site like Student Loan Hero and you’re going to read about things like front-end ratios and back-end ratios and it can all get very confusing. And, the truth is, the average person doesn’t need to know the nitty-gritty. The important takeaway is that, in your lender’s eyes, your income needs to be sufficient to cover a mortgage and all associated expenses when all your debts are taken into account. Having student loans in the hundreds of dollars per month can make it harder to qualify.
So what CAN you do if you’re looking to budget and buy a home, but student loans are holding you back? There are options.
Amass a higher down payment.
“If you can save a 20 percent down payment, your student loans are far less likely to affect your loan process,” said Student Loan Hero. Your lender should be able to give you details of what loans allow your down payment to come from gift funds from a family member.
Pay off your debts.
Talk to your lender about this. You may be surprised that a scenario in which you redirect some of your down payment funds to smaller debts that can be cleared out could make it easier to qualify for a mortgage. “Paying down that high-interest credit card balance, for example, is a great place to start,” said Dave Mele, president of Homes.com on Bankrate.
Get a side hustle.
If you can’t negotiate a raise, find other ways to make more money so you can add to your down payment or use it to pay down your student loans. “If education debt is making your debt-to-income ratio too high, consider looking for ways to pay off your student loans faster. There’s no penalty for prepaying student loans, so you can make extra payments anytime,” said Student Loan Hero.
Switch to an income-driven repayment plan on your student loans to make payments more affordable.
“An income-driven repayment plan sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size,” said Federal Student Aid. Fannie Mae changed underwriting rules around income-driven repayment plans last year, making it easier for those on these plans to qualify for a mortgage. “Depending upon the plan, your monthly payment could be capped as low as 10% of your discretionary income,” said Forbes. “And if your discretionary income is low enough, your monthly payment could be as low as $0.”
Get creative with your loan type.
While many first-time buyers opt for an FHA loan because of the low down payment (as low as 3.5%) and generous credit score requirements (as low as 580), there are other options. “The Fannie Mae HomeReady™ mortgage is another loan available to borrowers with student loans,” said The Mortgage Reports. “Via HomeReady™, buyers can show a debt-to-income of up to 50%, with certain off-setting factors; and a down payment of just three percent is allowed. The minimum credit score to get approved for a HomeReady™ home loan is 620.”