Student loan debt can be a drag, especially if you’re trying to buy a house. Fortunately, there are options. By taking advantage of the right loan programs, working on your credit and debt to income ratios and teaming up with the right partners, you can improve your chances significantly (not to mention, lower the cost of buying a home — both up front and for the long haul).
The common outlook is bleak: student loan debt is preventing borrowers everywhere from living The American Dream.
Here are 8 ways to maximize your chance of buying your dream home -- even if you have student loan debt.
Here are 8 action steps you can take right now:
1. Focus on your credit score
FICO credit scores are among the most frequently used credit scores, and range from 350-800 (the higher, the better). A consumer with a credit score of 750 or higher is considered to have excellent credit, while a consumer with a credit score below 600 is considered to have poor credit.
To qualify for a mortgage and get the best mortgage rate, your credit score does matter.
2. Manage your debts
All lenders evaluate your debt-to-income (DTI) ratio when making credit decisions, which could impact which loan and the interest rate you receive.
A debt-to-income ratio is your monthly debt payments as a percentage of your monthly income. Lenders focus on this ratio to determine whether you have enough money to cover your living expenses plus your debt obligations.
Since a debt-to-income ratio has two components (debt and income), the best way to lower your debt-to-income ratio is to:
- repay existing debt;
- earn more income; or
- do both
- Pay off the balance if you have a delinquent payment
- Don't skip any payments
- Make all payments on time (if not early)
- set up automatic balance alerts to monitor credit utilization
- ask your credit card to raise your credit limit (this may involve a hard credit pull so check on this first)
- pay off your balance multiple times a month to reduce your credit utilization
3. Pay attention to your payments
Payment history makes up 35% of your FICO so it's super important.
Since your payment history is one of the largest components of your credit score, to ensure on-time payments, set up autopay for all your accounts so the funds are directly debited each month.
FICO scores are weighted more heavily by recent payments so your future matters more than your past.
4. Get pre-approved for a mortgage
Too many people find their home and then get a mortgage.
That's backwards!
Get pre-approved with a lender first. Then, you will know how much home you can afford.
To get pre-approved, lenders will look at your income, assets, credit profile, employment, among other documents.
5. Keep credit utilization low
Lenders also evaluate your credit card utilization, or your monthly credit card spending as a percentage of your credit limit.
Ideally, your credit utilization should be less than 30%. If you can keep it less than 10%, even better.
For example, if you have a $10,000 credit limit on your credit card and spent $3,000 this month, your credit utilization is 30%.
6. Look for down payment assistance or grants
There are various types of down payment assistance, even if you have student loans.
There are federal, state and local assistance programs as well so be on the look out or ask your mortgage expert to see which ones you are eligible for.
7. Consolidate credit card debt with a personal loan
Option 1: pay off your credit card balance before applying for a mortgage.
Option 2: if that's not possible, consolidate your credit card debt into a single personal loan at a lower interest rate than your current credit card interest rate.
A personal loan therefore can save you interest expense over the repayment term, which is typically 3-7 years depending on your lender.
A personal loan also can improve your credit score because a personal loan is an installment loan, carries a fixed repayment term. Credit cards, however, are revolving loans and have no fixed repayment term. Therefore, when you swap credit card debt for a personal loan, you can lower your credit utilization and also diversify your debt types.
8. Refinance your student loans
When lenders look at your debt-to-income ratio, they are also looking at your monthly student loan payments.
The most effective way to lower your monthly payments is through student loan refinancing. With a lower interest rate, you can signal to lenders that you are on track to pay off student loans faster. There are student loan refinance lenders who offer interest rates as low as 2.50% - 3.00%, which is substantially lower than federal student loans and in-school private loan interest rates.
Each mortgage lender has its own eligibility requirements and underwriting criteria, which may include your credit profile, minimum income, debt-to-income and monthly free cash flow.
Student loan refinancing works with federal student loans, private student loans or both.
If you follow these 8 things, you'll be better equipped to manage your student loans and still buy a home.
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