How to Buy a Home — Even with Student Loan Debt

If you are one of the 44 million Americans with student loan debt, you may think that buying a home is out of your reach. But the good news is that having student loans doesn’t automatically disqualify you for home ownership. If you’re still paying off your education but want to become a homeowner, there are a number of steps you can take to increase your chances of success.

Raise Your Credit Score

Your credit score is the most important factor in qualifying for a mortgage, so make getting your credit in order a top priority. Check your credit score and report and make sure the information contained within it is accurate. Then, work on raising your score. Generally, a credit score of 700 or above is considered good, while 800 and above is considered excellent. The higher your score, the better your potential mortgage interest rate. 

To raise your score, pay all your bills on time and in full. Lenders like to see a history of steady and on-time payments, regardless of whether you’re repaying credit card bills, car loans, or student loans. If you’re someone who has a hard time remembering to pay bills on time, consider taking advantage of automatic bill pay so that you can’t forget. Check out our post 8 Ways to Improve Your Credit Score Before Applying for a Mortgage for more tips. 

Lower Your Credit Utilization

You should also strive to keep your credit utilization low. Your utilization is determined by dividing your monthly credit card spending by the total credit available to you on all your cards. Ideally, you should use less than 30% of your available credit each month. For example, if you have a total of $10,000 available to you each month, aim to charge less than $3,000. 

To help keep your utilization low, don’t close any old credit card accounts. Even if you don’t actively use those lines of credit anymore, they are still available to you and count toward your total. Keeping those accounts open also helps increase the longevity of your credit history, which is important to lenders as well. 

Another way to keep your utilization low is to ask the credit card company to raise your limit. This may be a good option if you’ve gotten a significant salary raise recently and you have had the card for a long time; if your income was lower when you first opened the card, you may now be eligible for an increase in credit.

Lower Your Debt-to-Income Ratio

If you’re hoping to buy a home with student loan debt, another important ratio to consider is your debt-to-income ratio (DTI). This is the total amount that you are obligated to pay each month (your car loan, your student loans, and your minimum credit card payments, for example) divided by the amount that you earn, and it’s used to determine if you can afford to take on another monthly payment. Lenders want to see your DTI be as low as possible. As a rule of thumb, they want to see you spending no more than 36% of your income on debt repayment. 

There are several ways to improve your DTI. On the debt side of the equation, you can refinance or consolidate your student loans to lower your interest rates, and potentially your monthly payment. If you can afford to pay off a credit card completely, choose the one with the highest monthly minimum payment. On the income side, consider taking on a second job or side gig to add another income stream. Take a look at your skillset and think about whether something like freelance work or part-time childcare could fit into your schedule.

Understand Your Down Payment Options

If you’re having a hard time saving up enough for a down payment while also paying your student loans, there are a number of programs available that will let you put down less than the standard 20%. Federal Housing Authority loans allow you to put down as little as 3.5%, and VA loans are an option if you’ve served in the military. If you’re buying in certain suburban or rural areas, USDA loans will let you put down zero. If you qualify, these programs can help you make your homeownership dreams a reality sooner than you might otherwise have thought possible.

Student loan debt can often feel overwhelming, but it doesn’t have to prevent you from achieving your dream of home ownership — with some careful planning and thoughtful money management, it is certainly possible. And when you’re ready to make that important step, we’re here to help.

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