According to TIME, an estimated 40 million Americans carry student loan debt, with 5.9 million of them owing over $50,000. That’s no small figure. So, if you’re still struggling with student loans, you’re far from alone. Unfortunately, many are under the misconception that carrying student debt means you’re not able to own a home.
Buying a home even when you’ve got student debt to pay off is possible. But, it requires a little more planning and forethought than buying without loans. Here are the steps you can take to get yourself ready to buy:
1. Focus on your credit score
The first step to buying a home, especially when you have debt to consider, is to make sure your FICO score is up to par. Since your credit score revolves around how well you manage to make small repayments each month, mortgage companies use this as an indicator of how well you’ll be able to handle repaying a larger home loan.
These days, a score of 730 and above is considered excellent credit, while anything below a score of 620 is considered low or poor credit. While you can get approved to buy a house with a score as low as 540, you’ll want your credit score to be as high as possible, so you can secure the best interest rates available.
If your credit isn’t up to par quite yet, don’t worry. There are some things you can do to improve your score. The first and most important is to make sure that you make your payments on time every month. Then, make sure to pay as far above the minimum payment as possible to work on paying down debts. You should also use as little credit as you can to boost your credit utilization ratio.
2. Manage your debt-to-income ratio
Beyond your credit score, you also have to consider your debt-to-income ratio. This number takes into account how much of your total monthly income is going to recurring bills. Here, it’s not just student loans that you have to consider. It’s also things like credit card bills, car payments, and medical debt.
Most mortgage companies won’t finance potential buyers who have a ratio of over 36%. You can find out your ratio by adding up your total monthly income and dividing it by your monthly bills, not including rent.
If your current ratio is too high, again, you have options. In this case, you can either raise your income by getting a side hustle or a second job. Or, you can work on paying down some of your debts. You could also do both to have the maximum impact on your ratio overall.
3. Refinance your student loans
If you have student loans, those are likely playing a big part in determining your debt-to-income ratio. Luckily, if they are currently keeping you out of pre-approval range, there are some things that you can do to get yourself back on track. The first of which is to consolidate and refinance your student loan payments.
When you consolidate and refinance your student loans, you’re turning multiple sources of debt into one, monthly payment. You’ll also likely do so at a better interest rate. These days, refinanced loans have interest rates as low as 2.5% - 3%, which can make paying them off that much easier.
If you decide to go this route, keep in mind that every lender has their own eligibility requirements and underwriting process. They’ll also likely look at your credit score, income, and debts to determine if you’re a good fit.
4. Get pre-approved
Getting a pre-approval is an important step for any buyer. After all, it’s what shows sellers that you’re able to purchase their home. However, it’s even more crucial when you’re carrying debt because this step officially determines whether or not you’re financeable.
When applying for a pre-approval, you’ll give your lender access to your financial documents such as W-2’s, pay stubs, and bank statements. He or she will then have someone in-house evaluate the documents to get a sense of how risky it would be, given your current financial status, to grant you a loan. If you’re approved, you’ll then be given an amount up to which the bank is willing to loan you.
If you don’t qualify on your first go-round, it’s not the end of the world. At that point, your lender will pinpoint what exactly it is that you need to work on. He or she can help you navigate what your best options are moving forward in order to get you to a place where you qualify for a loan.
5. Set your own budget
Keep in mind that your pre-approval will only show you the maximum amount that you can afford to take out in a loan. Many first-time buyers are under the misconception that they should make that amount into their budget. However, doing so may leave you feeling “house poor”, especially if you’re still going to be juggling student loans on top of a mortgage payment.
Instead, we recommend making your own budget and sticking to it. Play around with a mortgage calculator to get a sense of what your monthly payment could look like at a variety of sale prices. Then, when you find a price point that feels comfortable, work that figure into your regular, monthly budget. See how it would feel to pay it when combined with your other monthly expenses and adjust accordingly.