Parents have a tendency to tell you how much tougher things were “back in my day.” That may be true when it comes to ordering things online, but it is certainly not true when it comes to paying for college tuition. College Board showed that yearly tuition at state universities had more than tripled from 1988 to 2018. That price increase means more students than ever are relying on student loans.
The average student loan holder owes more than $37,000. That’s a lot of debt, and debt makes getting a mortgage difficult as well.
Difficult, but far from impossible. More than 25% of Americans hold student loan debt, and not all of them are renting. In fact, studies show that those with degrees are more likely to own homes, regardless of debt. People with a Bachelor’s Degree also have a 67.3% homeownership rate.
So the big question: How do YOU get into a home, despite your student loan debt?
1. Understand Your DTI
Your Debt-to-Income ratio (DTI) is a measure of how much debt you service, compared to your income. This is usually measured with across the scale of a month, and includes your theoretical mortgage payment. For example, let’s say you’ll pay $750 in student loan payments, $300 on your car loan, and a $1,000 mortgage payment during one month. Your household income is $5,200 for the month. Divide the debt by the income to get your DTI, which is .3942.
The standard “max” DTI that most lenders will allow is .43, but you should aim to get below .36 to be confident. Now that you understand DTI, what can you do to get it lower?
2. Pay Off Smaller Loans
Any debt you can remove from your record will work to your benefit. Odds are it won’t be your student loan debt! So consider your options. Maybe you still owe $4,000 on your car. It seems like a big pill to swallow, but if you can afford to simply pay it off today, it could benefit you greatly when applying for a loan. If you drop the $300 monthly payment from the example above, your DTI drops from .3942 to .3365. Nice!
One thing’s for sure: Definitely do not take on any new debt when preparing to apply for a mortgage.
3. The More You Can Offer Upfront, The Better
The concept is simple: The more you put down on a home, the less you need to borrow, and the less you need to pay month-to-month. Committing to 20% down will lower your DTI significantly from say, 10% down (as well as saving you from mortgage insurance costs).
Granted, 20% down can seem like a huge sum. That’s $50,000 on a $250,000 home. However, you can include cash gifts from relatives toward this down payment. After all, you paid for your tuition…maybe Mom and Dad can help you out?
4. A Steady Job Goes A Long Way
Recent graduates are more likely than anyone to jump between jobs. You’ve got time to find your ideal position…but it won’t hurt to stay put for a little if you’re looking for a home. This has nothing to do with your DTI, but lenders like to see that someone has a steady source of income…which means having a steady job to supply it. Sticking in one place for at least two years is a good benchmark.