How to Manage Your Student Debt and Qualify for A Mortgage

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Let’s get the good news out of the way: You can get a mortgage, even if you hold student loan debt. Very often, you’ll see pessimistic posts (including at this site) suggesting that student loan debt hampers your ability to become a homeowner. Hampers…maybe. Outright prevents? Not at all.

In fact, numbers released by Fannie Mae suggest that those holding at least bachelor’s degrees, even with debt, are significantly more likely to own a home than a high school graduate (who has no debt). More than 27 percent more likely, in fact.

Of course, student debt still makes a difference. Those who graduated college without student debt are 43 percent more likely to get into a home than high school graduates. And if you take on loan debt, hopefully you got a degree: Those who don’t finish college while holding student debt are 32 percent less likely to own a home than high school graduates.

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The focal point for those with student loans is their Debt-to-Income ratio, one of the major factors a lender takes into consideration before granting a mortgage. The target DTI will vary from lender to lender but let’s just say for the following example that a good target is 36 percent in order to qualify for a mortgage (definitely speak with an experienced lender to get a concrete goal for yourself).

Here’s an example: Let’s assume you and your spouse have a combined monthly income of $8,000. You pay $300 a month for your car, $800 a month on student loans, and $900 a month on credit card purchases…maybe bills, groceries, etc. If you divide your monthly debt into your income, you have a DTI score of 25 percent.

Now they add a $1,000 mortgage payment on top. Your DTI skyrockets to 37.5 percent…just out of your target range. Consider if you didn’t have student debt. That would drop your DTI to 27.5 percent…well within qualifying range.

Obviously you can’t just pay off your student debt. So how can you manage debt to get in a mortgage-friendly range?

Pay Off Low Balances

Look at your current monthly payments. What can you write off right now? Maybe it’s your car…maybe it’s a recently-purchased appliance. If the balance on the item is low enough that you can buck up and pay it off, it could make a huge difference for your monthly DTI ratio. It may be worth it to approach a parent and see if they’ll pay it off for you (to be repaid later, of course) just to get it out of your monthly debt calculations.

If you’re very close to the end of a loan period, some lenders will be willing to take closed-end loans out of consideration for your DTI if they can be paid off in the next 10 installments.

Congratulations...you've earned your college degree. Or at least a Kindergarten degree. Either way, it's never too early to think about managing your student debt.

Congratulations…you’ve earned your college degree. Or at least a Kindergarten degree. Either way, it’s never too early to think about managing your student debt.

Aim for Lower Mortgage Payments

“Well, duh,” you say. “Obviously I’m not trying to pay as much as possible on my mortgage payments.”

But have you considered other options aside from just buying a cheaper home? A lender can calculate how much home you can theoretically afford, but this total will change depending on a number of things, including where you aim to live and how you plan to pay for your mortgage.

Consider three pieces of property, each of which costs $200,000: One is a home, one is a home that’s part of a Homeowner’s Association, and one is a condominium. The latter two will actually be more difficult to afford because they also come with association fees (many condos also have HOAs). This will play into your mortgage considerations.

You can also decrease your mortgage payments by paying more upfront. The best bet is to suck it up and save cash for a 20 percent down payment (again, you could take loan from parents for this purpose). Another option is to pay for discount points from your lender. These cost 1 percent of your home’s value, and each will lower your mortgage rate by .125 to .25 percent (depending on lender). So, if you wanted to buy that $200,000 home today at 3.5 percent, you can pay an additional $4,000 upfront and lower your rate to 3.25 percent to 3 percent.

Lower Your Lifestyle Expenses

This is the toughest one to swallow for many…but often the simplest way to lower one’s monthly credit payments is to cut back on lifestyle purchases. Maybe that means going out every-other weekend to the bar or golf course instead of every weekend. Maybe that means eating at home more often.

It’s difficult to imagine but it is possible (we promise) and it will absolutely help you save money from your monthly bills (and, consequently, help you build up savings for a down payment).

With a little bit of planning, you can make a mortgage happen, even with your student debt load. Use this guide or speak with an experienced lender in order to figure out how you can make a mortgage work for you.