If you plan to buy a house, you will need to get a mortgage and qualify while carrying your existing debt, and yes, that includes your student loans. Over 44 million Americans carry student loans, averaging approximately $37,000 each. If you pay $300/month, it will take you about 17 years to pay off your student debt. So, living with student loans can be a financial burden for those just starting out in the job market.
Those of you in the 22-39 age range carry the largest percentage of student loan debt, and the average age of first time home buyers is 32 years old. So, student debt becomes part of the credit picture for a large percentage of first time buyers. However, student loans don’t have to keep you from realizing your financial goals, especially the goal of home ownership. Student loans are only one element of your overall credit picture, and paying on them promptly will have a positive effect on your credit score.
First Time Homebuyers
Since millenials make up the greater percentage of first time home buyers, let’s start with a breakdown of what kinds of mortgages are available for first time buyers. Mortgage loans are broken down into 4 basic types: FHA, VA, USDA, and Conventional. The vast majority of first time homebuyers opt to get into some variation of the FHA, VA, or USDA loan. These loans are appealing because they require the least money out of pocket for a down payment. For example, FHA requires only 3.5%, so on a purchase price of $200,000, the buyer needs only a $7000 down payment. Conventional loans (which aren’t backed by the U.S. government) vary in the amount of down payment required based on a buyer’s eligibility. VA and USDA loans do not require a down payment, and there are loan products specifically geared towards teachers and first responders. So, even with student loan debt, there are a lot of avenues for first time buyers.
Mortgage Money Guidelines
After the mortgage meltdown of 2008, the heavyweights of mortgage lending, Fannie Mae and Freddie MAC, introduced new guidelines regarding debt calculations on student loans. For instance, if you apply for a FHA, VA, or USDA mortgage to buy your first home and you have $80,000 in student debt, your lender is going to have to count 1% of your loan balance or $800 a month as your current monthly obligation. Adding $800 to your monthly debt obligations can significantly affect your ability to qualify for a mortgage. However, Fannie Mae and Freddie MAC have amended their original guidelines for conventional loans. Below are guidelines you can follow.
Both Fannie Mae and Freddie MAC offer conventional loans for as little as 3% down if your credit is above a 680.
So if you have student debt, and want to buy a house, what should you do?
There are two important things to focus on, credit and IBR (income based repayment).
The higher your credit score, the better loans and better rates you can qualify for. There are several free credit reporting sources, such as freecreditreport.com or creditsesame.com, that doesn’t affect your credit score every time you check and offer advice on how to improve your credit. Your goal is an aggregate score of 680 or higher.
It is very helpful to contact your student loan servicer and apply for an IBR. In the original example we saw that a lender would have to count $800/month towards your existing student loan debt. If your servicer calculates your income and issues an IBR of $50, that is the figure a lender can use to qualify you for a mortgage.
Having a pre-qualification letter lets you know how much you can qualify for and will probably be required by a seller who will want to know that you have talked to a lender and are a serious buyer.
Keep track of your credit score and make spending decisions wisely. For example, once you have decided that you’re ready to become a home owner, use credit cards wisely and delay any large credit purchases, such as cars or major appliances, so that your credit score remains intact. Check with your debt holders to see if you are eligible to have an adjusted monthly payment for your existing debt, and make sure that you make all of your payments on time. Of course, your income is also a big factor in determining your eligibility for a home loan.
This might all sound overwhelming, but that is why I am here. I can pre-qualify you and walk you through the mortgage process and help you get a better idea of where you are and where you need to be. Work closely with me and your Realtor for a successful home buying experience.
Senior Loan Officer
Village Bank Mortgage