Congratulations, you have decided that now is the perfect time to begin your journey towards homeownership! However, if you are reading this, that means you are worried about your student loan debt interfering with your goals. Unfortunately, student loan debt can put a damper on your home buying experience, but there are measures you can take before you start this process to prevent your debt from completely ruining your home buying goals.
Create a student loan repayment plan
For those of you still within the 6-month grace period, in student loan deferment or forbearance, creating a repayment plan for your student loan debt is better to do before you apply for a mortgage loan. To fully prepare yourself for the mortgage approval, make sure you have a repayment plan in place to assure lenders that you have a way of handling your debt. One course of action would be to consolidate your loans. If you have multiple loans with different loan servicers, consolidating your loans will combine them into one monthly payment, making it easier to track the debt you owe. Another proactive step would be to create an income-based repayment plan or a standard repayment plan. Your payments in an IRB plan depend on your income, whereas a standard repayment plan does not.
Lower your debt-to-income ratio
When being considered for a mortgage loan, lenders look closely at your debt-to-income ratio. If you have a high DTI due to your student loan debt, there are two main ways to lower your DTI enough to avoid lenders from being concerned. Try increasing your income by working overtime, taking on an additional side job, or finding a hobby where people can pay you for your service. Additionally, see if you can pay off any debt, such as your car loan or credit cards. Getting rid of any debt you have can reduce your monthly debt expenses and lower your DTI exponentially.
Improve credit score
In addition to your DTI, lenders also view your credit history to see your ability to repay loans. If you are worried about the state of your credit score, there are ways to increase your score in preparation for being approved for a mortgage loan. Show that you are a responsible borrower by paying on time and in full each month and using as little credit utilization as possible. Credit utilization of around 30% looks good to most lenders reviewing your credit history. Do not close any old credit accounts you may have and instead keep them active by making small purchases to each, allowing your credit score to increase gradually. Try to use multiple credit lines, such as auto loans, credit cards, and student loans, to show future lenders your ability to manage multiple debts.
Save up for down payment
Saving money is a significant part of your home buying journey and prepares you for when you have to put a down payment on your new home. Create a savings goal that tells you how much you need to save and how long it should take to get to that goal amount. Ask yourself how much you should be spending on a home based on your current income and other monthly expenses. A piece of advice to keep in mind is to put down at least 20% of a home’s purchase price. Doing this will prevent you from paying private mortgage insurance (PMI), an extra high-interest fee added to your mortgage. Once you have a set amount in mind, use budgeting methods such as the 50/30/20 rule. Use 50% of your income for needs, 30% for wants, and the last 20% for savings or debt repayment.
Refinance student loans
If you have high credit and a better handle on your finances than when you first took out student loans, you should consider refinancing. By refinancing your student loans, you could qualify for lower interest rates, save money, and even change your repayment period to manage your debt more efficiently. The first step to refinancing is to research different lenders and choose the best possible rate to meet your needs. Next, go over the loan terms to decide if you want fixed or variable interest rates and how long your repayment period should be. Refinancing can help free up money for other expenses such as a down payment for your home, and it can help lower your DTI ratio.
Buying a home while having student loan debt can be easily managed, as long as you plan financially ahead of time using these strategies. FinLocker has a variety of tools where you can implement these strategies, such as using our spending analysis tool to save for a down payment or receiving credit score and report notifications to help see where you need to improve. Refining your finances before you begin your home buying journey can prepare you for any hiccups along the way and ensure that your experience runs smoothly.