One of the biggest things that deters many first time homebuyers from going out and buying a house is student loan debt. The pressure on millennials and the younger generation to go to college and obtain a degree has left many young people tied to a large amount of student debt. Many of these buyers choose to wait until they’ve paid most of their loans before buying a house, but all hope is not lost if you’re still under the thumb of your student loans. Sure, buying a home can still be a challenge, but it’s not impossible.
The main issue that student loans present to the home buying process is that they are included in a buyer’s debt-to-income ratio (DTI). DTI is the percentage of monthly income that is spent on debt payments including mortgages, car loans, credit card payments, and student loans. This ratio helps lenders to determine what size mortgage you can take on or if you can even afford one at all.
Of course, not all loans count your student debt the same. For example, VA and FHA loans will not include a student loan in your DTI if the payments have been deferred for at least 12 months, but any student loans will be included in a conventional loan whether it’s been deferred or not. Even then, there are different ways that this debt will be looked at depending on the type of home loan you apply for, so it’s important that you talk to a lender before giving up on the idea entirely.
There are many things that lenders look at when you apply for pre-approval. On top of your DTI they also look into your credit score and your potential down payment. These things, when paired with your student debt, could still approve you for a reasonably sized home loan. The real issue is finding out if you can afford a mortgage payment, and while you might say, “yes,” your lender might say, “no.” Save as much and as often as you can, pay all your bills on time, keep your credit score up, and work your debt down as much as you can and you will still be able to obtain a home loan even as you sit on student debt.
It’s important to understand the impact your loans have so that you can adjust your needs and work with what you have. Student loans are an obstacle, but if you have a plan for buying a home you can overcome them.