If you went to college in the U.S., chances are you have student loans. One in five American adults, or 44.7 million people, has student loan debt. And while most Americans with student loan debt are young, many are older — the number of people over 60 carrying student loan debt has doubled in the past decade. Some will be paying off student loan debt for their entire lives.
But just because you have student loans doesn’t mean you can never buy a home. Even large student loan debts don’t have to preclude homeownership, as long as you’re comfortable carrying two long-term debts at the same time. You need to plan carefully for a home purchase, but that’s true of every first-time buyer looking for a home, even those without student loan debt.
Prepare for the Costs of Homeownership
When homeowners have buyer’s remorse about a home purchase, it’s usually because they didn’t prepare themselves adequately for the realities of homeownership and its hidden costs. The costs of homeownership don’t end with your down payment and mortgage payment. They also include the cost of homeowners insurance, property taxes and homeowners association (HOA) fees.
If you have a small down payment, you’ll have to pay for private mortgage insurance (PMI), which is an additional fee tacked on to your monthly mortgage payment. Get pre-approved for a loan so you can get some idea of how much you can afford and what your average closing costs will be. You’ll also have to pay for home maintenance and repairs, which can total thousands of extra dollars in a bad year, or no extra dollars in a very good year.
By preparing yourself to face these costs, you can mitigate their impact on your life. You can choose a home in an area with low property taxes or without an HOA. You can learn about the things that tend to drive up homeowners insurance, like wood-burning furnaces or pools, so you can avoid homes with those features. Educate yourself on current real estate trends in your market and what to look for when buying a house, so you can find a property that needs minimal or no work to make it move-in ready. And you can buy a home warranty to offset the out-of-pocket costs of home maintenance and repairs.
Clean Up Your Credit Score
You’ll be more likely to get a home loan and get a better interest rate if you have a good credit score. You should aim for a score above 680. Credit scores above 740 get the best rates.
To improve your credit score, pay your bills on time. Paying your bills in full and on time is one of the biggest factors of a healthy credit score, because it shows lenders that you can be trusted to make your payments. Keep your credit utilization ratio, or the ratio of credit account balances to total credit usage, below 30 percent. To help with this, keep old credit accounts open — doing so can improve your credit utilization ratio. Plus, the older the age of your open credit accounts, the longer your credit history, and the higher your credit score.
You should also try to use different types of credit. While using credit cards wisely can improve your credit score, showing a mix of installment loans and revolving credit accounts on your history shows your ability to juggle different types of credit.
Bring Down Your Debt-to-Income Ratio
Lenders will look at your debt-to-income (DTI) ratio, which shows what percentage of your monthly income goes to debt repayment, when deciding whether to give you a mortgage. Ideally, your monthly debt payments should be lower than 36 percent of your total income, and your total housing expenses should be less than 28 percent of your income. However, some lenders and loan programs are more flexible when it comes to DTI.
To improve your DTI, you can consolidate your student loans to get a lower monthly payment. If you have credit card debt, try paying it off or consolidating it with a lower-interest personal loan. If you have federal student loans, try applying for an income-based repayment plan to lower your monthly payments. You can also try improving your DTI by raising your income, either by asking for a raise or taking on a second job or side gig.
Get Down Payment Assistance
The biggest challenge most prospective home buyers face is getting together the down payment. While you can use money gifted from a relative towards your down payment, your lender will require a gift letter to verify that the money is, in fact, a gift rather than a loan, and that the giver is someone you’re closely related to. Lenders will examine your financial history closely and will require an explanation of any large, out-of-payroll amounts counting towards your down payment.
Traditionally, you’d need a down payment of 20 percent, but that’s no longer the case. FHA loans require a down payment of only 3.5 percent, although you’ll have to carry PMI if you have a smaller down payment. If you want to buy in a rural area, you can get a USDA loan with no down payment. Veterans and active military members may also qualify for down payment assistance, and some states offer down payment assistance to low-income residents or single parents. With down payment assistance from a government program, you don’t need a substantial savings account or help from relatives to swing a house down payment.
Student loan debt might seem to preclude homeownership, but the truth is that you don’t have to let it keep you from realizing your dreams. With careful budgeting, almost anyone can afford a home of their own. Once you’ve got the keys in hand, protect your budget with a home warranty from American Home Shield®.
For more helpful tips from our partners at American Home Shield, check out their blog!