Financing & Insuring

Student Debt and Buying a Home

May 7, 2019

Student debt is a hot topic these days, and little wonder: approximately 44.7 million Americans were paying back student loans as of 2017, according to the Federal Reserve Bank of New York (spreadsheet). If you’re one of them and have hopes of purchasing a home, the good news is that buying a home with student debt is achievable for many people. But each potential buyer should take a careful look at his or her student debt—and overall finances—to assess what’s smart for them. For some, it might be fine to add a monthly mortgage payment to their finances. For others, taking more time to pay down their student loan and save for a down payment could be the better approach.  Let’s take a look at some things to weigh as you consider buying a home when you have student debt.

Cash Flow

This has to do with how much money you’ve got flowing in and out of your bank account each month. Do you earn enough to meet your student loan payments, pay for all your other obligations and still have funds left over? If the answer is yes, then you might be able to buy a home. On the other hand, if you’re just breaking even each month—or even running a monthly deficit and increasing credit card debt—then it might not be the right time, assuming that renting is more affordable than buying (more on that in the next section).

Note: Bear in mind that your mortgage payment will include more than monthly principal (P) and interest (I) payments. There are also taxes (T) and home insurance (I) to factor in (Learn more about PITI). Many buyers also have to pay mortgage insurance and HOA dues.

The Cost of Rent

In some areas, paying a mortgage might be more affordable than the cost of rent. Or if you’re in an area where rent has been ticking upward year over year, budgeting long-term for student debt payments might be easier with a fixed-rate home loan that keeps housing expenses more even and predictable.

Cash on Hand

Unless you qualify for a VA or USDA loan—or for a homebuyer assistance program—you’re most likely going to need money for a down payment. These days, that’s as low as 3.5% down for an FHA loan and 3% down for a Conventional loan (comparison here). That may not seem like much to chip in (and in fact it is much better than the mythical 20% down requirement), but even 3% of a $200,000 home price is $6,000. Do you have that much lying around, or more if required?

If you don’t, you still have the option of accepting gift funds from a relative (or even a friend in some cases!), which can be used toward the down payment. If you’re able to come up with down payment funds, you’ll have to carefully consider whether spending a large chunk of money on a home is right for you in light of your student loan obligations and overall financial goals.

Note: A down payment isn’t necessarily all the cash you might need on hand for a successful home loan approval. You’ll also have to pay closing costs or settlement fees, one-time expenses generated by the origination of your loan. However, there are circumstances where a builder or lender might offer to pay your closing costs. Or, if you qualify, there may be a homebuyer assistance program available to assist with closing costs or settlement fees.

Credit Score

In order to qualify for a home loan, you’ll need a credit score the lender finds acceptable. If you’ve been able to keep up with timely student loan payments and your credit is in good standing, then buying a home when you have student debt may be completely feasible for you. But if you’ve missed or been late on student loan or other payments, you may have negative information on your credit report that lowers your score and dissuades lenders from approving a mortgage loan. To check up on your credit, get your free annual report here.

Note: Your credit report reflects activity with your credit that a lender might find pertinent. It doesn’t, however, include your FICO® score, a number derived from information in your credit report that requires a separate credit check (which a lender will run when you apply for a mortgage).   

Emergency Funds

Owning a home is exciting, but it’s also a big responsibility. For most renters, the landlord gets the bill if there’s a broken appliance or other unexpected expense. But if you’re a homeowner? That cost falls to you, unless an item is covered under a warranty or insurance policy. Have you thought about how to handle regular maintenance expenses? If you’re able to budget for these scenarios while making student loan and mortgage payments, then you may be in good position to buy a home.

We hope this has offered useful information on buying a home with student debt. If you think you’re ready to shop homes, check out what’s available in your area at RichmondAmerican.com!

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