Does having student loan debt make buying a home more difficult?
Mortgage interest rates remain near historic lows, creating a tempting opportunity to enter the market as a first-time home buyer. But student loan debt can present a barrier to buying a home.
The average borrower owes $ 33,654 in student loan debt, according to data compiled by Credible. The average repayment plan is $ 393 per month, which could easily hurt your ability to pay a mortgage.
President Joe Biden’s plan to cancel student loans might offer some relief to potential home buyers, but it could take months and not cover private student loan debts. In the meantime, here’s a closer look at how student debt might affect your ability to buy a home – and what you can do about it.
Saving for a down payment can be difficult
A larger down payment can mean less financial expense and potentially lower monthly mortgage payments, leaving more room for your personal finances. About 26% of first-time home buyers cited saving for a down payment as the most difficult part of the home buying process, according to a Report 2020 of the National Association of Real Estate Agents (NAR).
There are two ways that student debt could affect your ability to buy a home. First, if you can only save a small down payment, student loan payments could limit your options for properties and mortgages. Second, you may have to delay buying your home if you hope to save a larger down payment.
Refinancing student debt could help lower your monthly payments while saving money on interest, leaving you with more money in your budget to spend on a down payment. If you are interested in the benefits of refinancing, you can visit Credible to view student loan refinance rates from multiple lenders in one place.
Student debt could increase your debt-to-income ratio
Your Debt-to-Income Ratio (DTI) is the percentage of your income that goes towards paying down debt each month. This number is important because most lenders cap the maximum authorized DTI at 43% for qualified mortgages, according to the Consumer Financial Protection Bureau (CFPB).
If your monthly student loan payments cause you to exceed this threshold, then you may be turned down for a home loan. It is also important to note that lenders do not have to strictly adhere to the 43% DTI rule; they could lower the maximum debt-to-income ratio allowed.
Refinancing these student loans could help lower monthly payments and improve your DTI. You can use a online student loan refinance calculator to estimate what your new monthly payments might be. With Credible you can get prequalified for student loan refinance rates without affecting your credit score.
Think carefully about refinancing federal student loans, however. Under the Biden administration’s loan cancellation plan, only federal student loan debt would be eligible. Refinancing federal loans into private student loans could cause you to miss out on this advantage.
Missing payments could hurt your credit score
Besides your DTI ratio, mortgage lenders also take a close look at your credit history when deciding whether or not to approve you for a home loan. Late or missed payments or a default on your student loan could lead to a drop in your credit rating. While there are bad credit mortgage options, they can come with higher interest rates, making it more expensive to buy a home in the long run.
Setting up automatic payments can help avoid the possibility of missed or overdue payments affecting your credit. Your lender may offer an interest rate reduction for signing up for automatic payment, which could help you save money on interest over the life of the loan. This option may be available for federal student loans and private student loans.
If you’re having trouble paying off your federal student debt, you can contact your loan officers to discuss options. Federal loan borrowers currently have their loans forborne until September 30, 2021, but you may need to continue with additional forbearance or postponement after this window closes.
With private student loans, it is up to your lender to decide whether they offer some type of forbearance or deferral for financial hardship. If your loan managers don’t allow forbearance or deferrals of any kind with private student loans, refinancing your loans elsewhere could help make payments more affordable.
At the end of the line
Student loans can be a barrier to buying a home, but it’s still possible to achieve your goal of buying the home of your dreams. Speeding up your student debt repayment can help, and this is one of the reasons borrowers are considering refinancing their loans. You can visit Credible to view student loan refinance rates from several lenders today.
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