How to Buy a Home with Crushing Student Debt

Student Loans: To Solve Problem, Understand History | Kiplinger
Millions of people across the U.S. know what it’s like to live with the nearly unbearable weight of student debt. While many have come to terms with the reality that they’ll likely be paying down their loans for decades, the financial self-consciousness remains. This insecurity comes rearing to the surface when attempting to make new purchases, especially big-ticket items like a brand-new home. Fortunately, it is still possible to get into your dream home, even with your crushing student loan balance. Follow the tips below to
overcome your debt and secure the home you’ve always wanted.

Reduce Your Debt

The debt-to-income ratio applies no matter what state of repayment you are in. Whether you are actively paying back your loans or are in a deferment period, the loans that are in your name have an impact on your debt-to-income ratio. This aspect of your finances is a critical factor that potential lenders consider before extending a loan offer. Why? It is a reflection of your financial capacity to pay back a mortgage loan, signified by the portion of your monthly budget that is available for repayment. 

The debt-to-income ratio is also a crucial element in the formulation of your credit score. Ratios that are too high (meaning that your debt repayments take up too much of your monthly income) can hurt your credit score and are highly likely to make you a risky candidate for lending. To improve your chances of approval, demonstrate your ability to repay by reducing any debts in your name (credit, auto, etc.). 

Get Federal Assistance

Prospective home-buyers with student loans have numerous options available to ease the burden. There are three alternatives available through Fannie Mae:

  • Debt Paid by Others: If a non-mortgage loan is in your name, but you do not repay it, it can be excluded from your debt-to-income ratio. This improves your borrowing eligibility. 
  • Student Debt Payment Calculation: A lender can view student loan information on your credit report. This, again, gives them an idea of what types of loans are in your name, boosting your chances of borrowing.  
  • Student Loan Cash-Out Refinance: With this option, you can refinance for a lower mortgage payment while whittling away at your student debt. 

Borrow with a Co-signer

If you cannot take advantage of any of the above options so as to clarify what portion of your debt is student loans, consider borrowing with a co-signer. This way, your credit report is not the only one in consideration. A co-signer with healthier finances or a better credit score than you can make a dramatic difference in the loans you are eligible for. (Keep in mind, though, that if you do go this route, the only way to remove the co-signer is to refinance the loan.) 

As you develop your plan to strengthen your financial qualifications, consult a mortgage professional. They will thoroughly review your financial circumstances and advise you on the best route to take to improve your eligibility for a mortgage despite your student loans. Get in touch with a mortgage professional today to get started.

 

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