There has been a lot of discussion about the impact of student loans on young adults’ ability to buy a house. Newly employed college graduates find their paychecks tied up in monthly student loan payments, making them think twice before taking out a mortgage. It can be a challenge to own a home while still paying off student debt but it is still a possibility for young adults. If you are thinking about purchasing a home and you have student debt, here are some things to keep in mind:
Debt to income Ratio: This ratio is a measure of how much monthly income goes toward paying off debt. Student loans, car loans, even credit card debt factors into this amount, which is used by banks to determine how large a mortgage you can qualify for. It’s important to distinguish that the debt to income ratio is calculated based on your monthly payments, not how much you owe in total. Though the total amount you owe factors into their risk analysis, lenders care more about how much of your mortgage you’ll be able to pay back each month.
Credit score: Just like with student loans, mortgage lenders use your credit score to determine both your eligibility for a mortgage and interest rate. If you’re making your monthly payments on time, your student loans will reflect positively on your credit score and improve your chances of securing a mortgage.
Which comes first, the down payment or paying back loans?
Saving for a down payment can seem daunting while still repaying your student loans, but it can be done. If you’ve already saved up, think about whether you want to use that money for a house or to pay off student loans. If you have high interest student loans, it would be beneficial to pay off those loans before buying a house. If you have low interest loans or you refinanced to a lower rate, consider putting that money down for a house.