Friday, June 07, 2013

How Student Loans Affect Buying a Home

In an August 2012 report, the Huffington Post stated that college tuition has risen 1,120% since 1978. Since the recession in 2008 banks and financial institutions have been more stringent with approving mortgage loans. In addition to the recent payout of the $25 billion settlement charged by the federal government regarding foreclosures, banks and financial institutions are uneasy about approving risky mortgage loans.

For first-time homeowners or younger borrowers this makes it difficult to get approved for a mortgage loan or for the loan amount desired in addition to the large amount of student loan debt owed.  Many first-time homeowners or younger borrowers have a limited credit history or bad credit along with a modest employment history and low income which makes it even more difficult to get approved. According to the Federal Reserve in the past 3 years only 9% of those ages 29 - 34 were approved for a first-time mortgage, compared to almost 17% approved 10 years ago.

One factor considered in mortgage approval is your debt-to-income ratio (the percentage of your income required to pay your total debt including credit cards, student loans and other debt) which should be between 28% - 36%. Some lenders may use higher ranges up to 45%.  This ratio is used to determine how much you can afford to pay each month towards a mortgage payment. Another factor is your credit score.  If you have a low credit score you may get denied, have to pay a higher interest rate and additional fees or get approved for a small loan.  If you have bad credit (low score) and a high debt-to-income ratio this makes approval even harder.

Student loan debt has reached $1 trillion. Luckily I didn’t have this problem because I received scholarships when I went to college along with assistance from my grandparents. I only had to repay one  small student loan for $5,000 and was able to pay it off within 3 years.

College students who graduated prior to the 2008 recession and those who foreclosed on their homes or became unemployed due to the recession may also be impacted due to their high student loan debt which can take 20 - 40 years to pay off depending on your salary, loan amount and financial situation.

Due to the tough economy it is harder to find jobs that will pay enough to even begin tackling student loan debt and pay for necessary living expenses. Those who earn a modest income will find it even more taxing to purchase a home. This data proves that those wanting to buy a home are worse off than previous generations including their parents.  Here are 13 ways to help you get approved for a mortgage loan if you still owe student loan debt.

  1. Use Cash. Pay for items with cash. Stop incurring more debt and pay cash for all items.
  2. Consolidation. Explore consolidation options to see if you can combine your student loans into an affordable payment and lower interest rate. However, not all consolidation loans will provide you with a lower payment or lower interest rate.
  3. Credit. Fix any errors on your credit report and pay off any late payments to help increase your credit score.  Make all debt payments on time for at least two years prior to applying for a mortgage loan.
  4. Down payment. Save as much as you can towards a down payment. You will look more favorable to lenders if you have 20% of the sales price saved for the down payment.  If you can’t afford that, try to save at least 10% for the down payment.
  5. Job. Consider getting a second job or working over-time and use the money earned to pay down your student loan debt.
  6. Debt. Pay off all revolving debt first such as credit cards or lines of credit, then focus on paying down your student loan debt.
  7. Student Loans. Send more than the minimum monthly payment. Pay as much as you can during the first 2-3 years of loan when the greatest amount of interest is accrued.  Make sure you don’t miss any payments.  If you previously deferred on a loan, ask about programs to rehabilitate the loan to put it back in good standing. Once the loan is rehabilitated ask if the negative payment history can be removed from your credit reports to help boost your credit score.
  8. Balance. Aim to pay off 30-50% of your student loans to reduce your debt-to-income ratio.
  9. Comparison Shop. Start with your local bank or credit union when shopping around for a mortgage loan. Also compare lenders online such as Lending Tree or Bankrate to find the best deal for you.
  10. Payoff plan. Start with the smallest student loan first and pay that off, then continuing working your way up to pay off your other loans up to the largest loan.
  11. Payment. Use mortgage calculators to determine how much of a mortgage payment you can afford
  12. Extra. Use all extra money from commissions, bonuses, tax refunds, settlements, insurance payments, and other sources to pay down your student loan debt.
  13. Loan. Consider applying for a FHA loan which requires a smaller down payment and less stringent mortgage approval requirements.

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