It’s sometimes more difficult to be a first-time home buyer as compared to an experienced one.
First-time buyers are often younger then the general home-buying population – that typically means less work experience, lower income levels, and less money saved for down payment.
In many cases, it also can mean higher levels of federal student loans and debt.
Concerns about student loan obligations are among the reasons why first-time home buyers account for a smaller percentage of the housing market as compared to recent years.
The good news, though, is that homeownership and student debt aren’t mutually-exclusive. You can buy a home, get approved for a mortgage loan, and still make good on your student loans.
Income, Assets, Debt, and Credit – they key pieces
As a home buyer, your ability to get approved for a mortgage is based on for things — your down payment on the home, your current credit score, and your income, and your debt position.
Down payment matters because the size of your down payment determines for which mortgage loans you might be eligible.
For example, the VA mortgage and UDSA home loan both allow for 100% financing. Therefore, if you plan to use either of these two programs, it doesn’t matter whether you have a down payment or not.
However, with no down payment, you would not be eligible for an FHA home loan or a conventional one, which require 3.5% down and three percent down, respectively. The borrower’s credit score matters for the same reason.
As far as credit is concerned, all mortgage programs require that buyers meet some minimum credit score requirement. For some programs, minimum credit scores are high. For other programs, minimum credit scores are low.
It’s your monthly income relative to your debt, however, that is arguably the most important trait in your mortgage loan approval. Known as your debt-to-income ratio (DTI), this calculation is believed to be the best predictor of whether you can actually afford to buy.
Student Loans and Mortgage Approvals
A buyer’s debt-to-income ratio is a percentage that shows the amount of your monthly income required to repay your debts.
For example, if you earned $5,000 per month and had a monthly debt obligation of $2,000, your debt-to-income ratio would be 40%.
In general, your DTI must be 43% or less in order to get mortgage-approved for mortgages backed by Fannie Mae and Freddie Mac – but there are multiple exceptions.
For first-time buyers with student loans, though, using every available piece of DTI may be necessary. This is because student loans can eat into your budget and redirect they cash you’d rather be putting toward housing.
Consider that the average college student graduates with monthly debt totaling $300 per month. Add a car payment and a few credit cards, and monthly debt more than doubles to eight hundred dollars per month.
Assuming a monthly income of $4,500 and a maxing out of the allowable debt-to-income ratio, a first-time home buyer with student loans can “afford” a home for around $200,000, assuming a low-downpayment FHA mortgage.
But, student loans don’t have to be a barrier to entry. You have means to reduce your monthly student loan payments, which can help you with your home loan approval.
Student Loan Advice For First-Time Home Buyers
Per Pogol and the Mortgage Reports, one method by which to reduce your monthly student loan obligation is to switch to a graduated repayment plan on your loans.
“A graduated repayment plan is one for which the payment starts low, then rises every two years to meet the rising income of a typical college graduate. With lower monthly payments, your debt-to-income ratio is reduced, which can help you qualify for your home loan.”
Loan consolidation is another way to reduce your monthly student loan obligation.
It’s likely that your student loans are of different amounts, and at different rates of interest. By consolidating your loans, your can lump your principal balances together at, hopefully, a lower interest rate.
You can also request a lengthening of your payback period, known as your “term”.
Pogol states, “by lengthening your term to 15 years or 20 years, you can reduce the amount that you owe each month, which lowers your DTI. This will increase the long-term interest costs of your student loans, but will lower your monthly obligation.”
And, a third option doesn’t relate to student loans at all — but, rather, credit card payments and other monthly debts.
If graduated payments and student loan debt consolidation are not part of your plans, consider reducing your high-balance credit cards or any other debt which carries a high minimum monthly payment.
For example, if you have a credit card which requires a minimum monthly payment of $150, and that’s more than your other credit cards, you can reduce that card’s balance, which will reduce the monthly payment due, which helps to lower your DTI.
Mortgages For Buyers With Student Debt
As a first-time home buyer with student debt, there are a number of mortgage loan programs well-suited for your needs.
Many allow for low-downpayment and 100% financing, as well.
The FHA loan, for example, which is backed by the Federal Housing Administration (FHA), allows for a downpayment of just 3.5 percent for borrowers with a credit score of 580 or higher.
FHA loans allow debt-to-income ratios of up to 43%, but will allow higher debt-to-income ratios on a case-by-case basis .
You can also use the FHA home loan if your credit scores are below 580, but a larger downpayment of ten percent is required.
The Fannie Mae HomeReady mortgage is another loan available to borrowers with student loans. Via HomeReady, buyers can show a debt-to-income of up to 50%, with certain off-setting factors; and a down payment of just three percent is allowed.
The minimum credit score to get approved for a HomeReady™ home loan is 620.
It would be my pleasure to help the first time buyer find the right program that fits their needs ad budget!
The views expressed are my own and do not necessarily reflect those of American Financial Network, Inc.
