A staggering number of college graduates are saddled with student loans. Often times, these young adults believe home ownership is not possible and they continue to rent, assuming it is their only option. But in reality, this does not have to be the case. Buying a home while still paying on student loans can be a reality for many with the proper preparation and expectations.
Below are some tips to focus on and ways to make home ownership a reality.
The first thing to check is your credit score. Generally speaking, a credit score of 750 or higher is considered excellent, and a score below 600 is considered poor. If your score is on the lower end of this range, there are certainly ways to increase your score before applying for a mortgage.
- Make on time payments each month on all your bills
- Do no open any new credit cards or open new lines of credit.
- Avoid closing old accounts.
- Lower the amount of credit you are actually using.
You must also determine your debt-to-income ratio (DTI ratio), and if necessary, lower your debt-to-income ratio. Your debt-to-income ratio is the percentage of your debt against your monthly income. Lenders rely on this number to determine whether or not you actually have the finances to pay your mortgage each month, while also paying off existing debt. To lower this ratio, you have a couple of options.
- Pay off existing debt by making additional payments when possible
- Avoid new credit accounts
- Earn extra money by acquiring a second job or working overtime
If you do not have much of a credit history, you might need to build your credit first. If the only creditor listed on your credit report is the agency you have your student loan through, try applying for either a car loan or personal loan, along with a credit card, and make your monthly payments on time. If you are getting a credit card for this reason, strive to pay it off each month. This way, you are building credit while also keeping your debt-to-income ratio low.
If you have multiple student loans or personal loans you are paying on, try to consolidate your loans into one, and try lowering your interest rate if possible.
Check out first-time homebuyer programs that are available through federal and state agencies. There are many programs out there that offer no or low down payments, payment assistance, and low interest rates.
You may also find that you qualify for additional assistance on down payments and closing costs if you qualify as low income, are active military or a veteran, or a public servant. Assistance is out there, you just need to take the time to research what is available to you.
Be sure to get pre-approved for a mortgage before finding a house you fall in love with. If you find you do not qualify at the time, the lender will review the reasons why and you will know what you need to work on in order to qualify in the future.
Though having student loans might make home-ownership more different for some, it is not impossible to achieve. Being financially responsible and monitoring your credit score and DTI ratio are key factors in working towards your dream and keeping your financial health in check.