Tips for Purchasing Your First Property Even When You Have Student Loan Debt
Data collected from TICAS’s Project on Student Debt has revealed that the average college student graduating with a bachelor’s degree this year will officially begin adulthood with a culminated debt ranging between $26,000 to $40,000, a number that can deter one from growing retirement funds, investing in stocks, alongside other prominent steps towards securing a stable and healthy financial portfolio. However, even with massive student loan debt considered, moving forward and making a large purchase can be achieved with financial insight and careful planning. Here are a few tips to buying your first property even when you have student loan debt.
1. Don’t Be Late on Your Payments
First and foremost, paying off debt begins with making prompt payments one month at a time. Creating a habit of setting aside money, even up to six months in advance, in preparation for your upcoming student loan bill can have significant benefits down the line. Sean Hulsey, a sales manager at Wells Fargo Home Mortgage, suggests paying down high interest debt as soon as possible, even favoring paying bills over growing your savings. “The important thing to know,” says Hulsey, “is that debt is debt, and we look at student loan debt like an auto loan, credit card, or any other type of loan.” The highest priority in paying debt is paying off the ones with the highest interest first.
Though many people pay near the minimum amount on their credit card on a monthly basis, Hulsey argues that the key to moving forward with a healthy financial life starts with paying down high interest debt first. “The important thing is that consumers are making their debt payments on time,” says Hulsey. Doing so can allow for greater flexibility when applying for a mortgage loan, in which lenders require good credit.
Deborah Sweeney, a graduate in business and law, began her post-grad career with an accumulated $80,000 in student loan debt. However, she didn’t let her debt deter her from purchasing her first home at 24 years old.
“I consolidated my loan,” Sweeney says, “and I always paid more than the actual monthly payment to pay down my loan as quickly as possible.” She was able to leverage her good credit, also known as a FICO score, from paying her bills on time to get approved for a $750,000 house in Los Angeles. Sweeney’s financial plan to purchasing her first property was bolstered by a presumably favorable DTI ratio, which leads to the next point.
2. Improve your DTI Ratio
Before settling down and taking out a loan for your first property, a significant factor that lenders depend on for approval is a borrower’s debt-to-income ratio (DTI). One’s DTI is simply the percentage of monthly income that is used to service debt, such as loan payments, auto loans, credit cards, and other installments or revolving debt. This comparison prompts lenders to look for borrowers who have a DTI ratio lower than 36%. Although special government programs and compensating factors like high credit ratings and high income can approve borrowers with higher DTI ratios, a mortgage lender will typically reject your loan application if your DTI ratio does not meet a certain criteria.
Mark Kantrowitz, senior vice president and publisher of edvisors.com, says, “One way a student loan borrower can increase the likelihood of qualifying for a mortgage is to choose a student loan repayment plan that yields a lower monthly payment, such as extended repayment or income-based repayment. ”This process, he suggests, can help you to lower your DTI by taking advantage of different repayment options. Refinancing or consolidating student loan debt to obtain a lower monthly payment can significantly improve the DTI ratio, which could ultimately help you qualify for a mortgage. Highly leveraged people with both student loans and mortgages, however, can benefit from repayment plans as an unforeseen plight in income or savings can hinder timely payments. Among the greatest struggles for those with student loan debt is getting approved for an additional loan. Researching your DTI early on and improving its ratio is a vital process for securing good terms on a future loan.
3. Explore Down Payment Assistance Programs
If large amounts of student loan debt are being paid off every month, chances are that less money is being saved for a hefty down payment. Down payment assistance and crowdsourcing programs in local neighborhoods can be of great support to buyers whose savings have been negatively impacted by their debt. Many cities across the country have specific programs to assist qualifying homebuyers to pay their down payment, a strategy that can be central towards attaining one’s first property.
Alternative approaches such as down payment assistance can also be found in financing strategies such as buying owner-financed homes, rent-to-own, and developing vacant land, all of which serve to help potential buyers find and own their own home. These processes all act as safe-guards towards purchasing wisely, meaning those who partake in these strategies approach owning a home as a means of making money in the long-term, not just one that is immediately affordable. With more research being done in real estate management and finance, down payment assistance programs are quickly becoming promising avenues for younger post-graduates seeking to buy their first home.
With careful financial planning and insight, student loan debts that, at first, seem like a deterrent towards moving forward and purchasing a home, can be viewed as a means to leverage one’s own financial state. By growing your FICO score, improving your DTI ratio, and investigating alternative assistance programs, attaining your first property can be less intimidating and more of a positive learning experience than you may think.