Tips & Tools

Student Loan Debt and Homeownership

May 4, 2017
Graduation cap with money

Having a college education is very valuable. Unfortunately, the price tag often reflects this, and navigating post-graduation financial waters can be tricky. That being said, student loan debt shouldn’t be a barrier to homeownership. There are ways to balance the responsibility of paying off student loans and still enjoy homeownership. Here are a few concerns these buyers may have about buying a home, and some ways you can address them.

“I can’t save up for a down payment while making student loan payments.”

Saving for a down payment on a home may be challenging while making monthly student loan payments. Suggestions for making that easier could include:

  1. Consider refinancing. Your buyer may not be aware that they may be able to refinance their student loans which could allow for a reallocation of funds to be used for a down payment. It is important to remember that refinancing into an income-based repayment program may extend the amount of time it will take to pay off the debt.
  2. Ask for help. Let your buyers know that a gift—not a loan—from a family member could help them afford a home sooner.

For all student loans, whether currently in repayment, deferred or in forbearance, the lender must include a monthly payment in the borrower’s debt to income ratio when qualifying the buyer.

“Can I get a good enough credit score if I have student loan debt?”

Most buyers know that their credit score impacts their ability to finance a home. Buyers with significant debt are even more impacted by their credit history and score. Emphasize the importance of this number and let them know what they can do to improve it:

  • Pay bills on time, including student loan payments. This may be obvious, but it makes a significant difference and is worth noting.
  • Do not close old credit card accounts.
  • Maximize the amount of unused credit. Having available credit that is not being used is good for credit.
  • Have different types of credit. Student loans are installment loans and can diversify the type of credit your buyer will have. Having a car loan is similarly beneficial and shows the ability to pay off an installment loan which differs from using a credit card.

For more detailed information, check out our Credit Score Management Guide.

“Will a lender give me a mortgage loan, if I already have a student loan?”

The buyer’s debt-to-income ratio can be a determining factor in getting a mortgage because lenders want to make sure borrowers will be able to pay back the funds they have committed to repay.

To determine your ratio, add up all your monthly debts, including car, student loan and credit card expenses and the potential mortgage payment, and divide it by your gross monthly income. In order for a mortgage to be backed by the government, this number can’t be higher than 43%.

(CNN Money)

According to The New York Times, “It’s a Good Time to Trade in Your Student Debt for Home Debt.” Fannie Mae is making changes to help those with student loan debt be able to purchase a home.

Help your clients feel more in control of their decision to buy—or not to buy.

Purchasing a home is certainly possible while paying back student loans, but it is important to evaluate this decision on an individual basis. What works for one buyer may not be feasible for another. However, talking with your clients about their options could open their eyes to possibilities they hadn’t considered. Having your clients’ best interest in mind always pays off in the end.

Is your client ready to move forward? Try this free First-time Homebuyer Guide.

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