How do student loans affect the homebuying process? With over 42 million Americans having student loan debt, it’s a common question. The good news is that having student loans does not mean that you can’t get approved for a mortgage – but that doesn’t mean it won’t have some impact either!
Student loans will add to your debt-to-income ratio
Once you apply for a mortgage, one of the many things your lender will look at is your debt-to-income ratio, known as DTI. Your DTI is how much money you owe compared to how much money you make each month and it can include your car loans, credit card payments, student loans and more. The lower your DTI, the better chance you have at qualifying. If your DTI is over 50%, consider focusing on paying off as much high-interest debt as you can before buying a new home.
Student loans can affect your credit score
A higher credit score means a better chance of getting approved for a mortgage and receiving the best interest rate possible. When calculating your credit score, the biggest factor will be your payment history. Lenders want to see a long history of on-time payments. Therefore, if you miss a student loan payment, it can significantly hurt your score. So be sure you’re paying all your bills on time every month!
Student loans may hinder your savings
One of the more immediate effects student loans will have on your homebuying journey is how much you can save. Those extra hundreds of dollars each month can be frustrating when trying to save for a down-payment. However, saving up for a 20% down-payment is not as necessary as it was in the past. There are plenty of loan options geared to first-time homebuyers that require as low as 3.5% – and if you’re an active military personnel or a veteran, you could even qualify for a zero-down VA loan!
