Paying off student loans represents a significant financial obligation, leaving many to wonder – is it a bad idea to buy a house if you’re still paying off student loans?
As with most things when it comes to money, there’s no one right or wrong answer for every person. But, there are some important points to think through. If you’re considering becoming a homebuyer while paying off student loans, check out these five questions to help you make a few key financial considerations.
What’s your debt-to-income (DTI) ratio?
You have a much better chance of being approved for a home mortgage loan if you have a low debt-to-income (DTI) ratio. Most lenders are looking for a DTI ratio of 28% at the most, meaning your monthly debts – including credit card payments, student loans, auto loans, rent and so on – don’t amount to more than 28% of your monthly income. Keep in mind that your monthly mortgage interest payments may be deductible when you file your income tax returns. Check with a tax advisor as a deduction could have a significant benefit that is often overlooked.
You can do a quick calculation on your own by dividing your monthly debts by your monthly pre-tax income, to get some sense of how a potential lender might respond to your loan request. Also keep in mind that depending on your savings, assets and credit score, a higher DTI isn’t necessarily the end of the road for your house-buying dreams.
Can you increase your credit score?
Having a higher credit score usually means getting a lower interest rate on your home loan, which can make a big difference in terms of how much money you’ll ultimately spend when buying a house. You can check your credit score for free through any of your credit cards, or by requesting a free copy of your credit report from a credit bureau.
If your score isn’t where you’d like it to be, it might be worthwhile to work on increasing your credit before you purchase a house. Paying down debt, like student loans, can help to boost your score. Other steps include avoiding new lines of credit, and ensuring that all bills such as loans, utilities and so on, are paid on time.
How much can you afford?
In general, it’s considered a good idea to wait to purchase a house until you’re comfortable making a 20 percent down payment. Having these funds ready to go helps improve your chances of getting approved by a mortgage lender, and getting a good interest rate on your home loan.
If you can afford a 20 percent down payment while still making the required minimum monthly payments on your student loans, that’s a good sign that you could be ready to buy a home. On the other hand, if you foresee other big expenses in the near future – such as a wedding, a job loss, or a spouse taking out their own student loans – consider where your funds will be best spent.
Do you qualify for homebuyer assistance?
The good news for uncertain homebuyers is that there are a number of down payment assistance programs which may be able to help you afford your home sooner, rather than later. The federal government has a variety of assistance programs for first-time homebuyers, service members and veterans, low-income buyers, and more.
Local homebuying assistance is often available as well, through state agencies. Using these resources, you may be able to find affordable mortgage financing or homebuying options that only require a down payment of 5 percent, or even less.
Are you sure it’s the right time?
Finally, even if you decide that you are financially able to buy a home while paying off student loans – ask yourself if it’s definitely the right time to make a purchase. How long have you lived in the area where you’re looking to buy? What’s the breakdown of costs in terms of monthly rent, versus monthly mortgage and other homeowner costs? And, what’s the real estate market doing at the moment, which could impact your investment for better or for worse? Talk with a qualified real estate professional or a financial advisor you trust if you need more input on determining whether it’s the right time to buy.
To learn more about the home buying process and the options available to you, visit huecu.org/home-loans and get in touch with one of our mortgage professionals!