Saving for a down payment after graduation used to be the typical thing to do, but now with student debt rising, it may seem out of reach for some. Don’t lose faith, it’s still possible! Here are what lenders are looking at and how your student loan debt affects your approval for a home loan.
Getting a Mortgage with Student Loan Debt
What do lenders look at?
When reviewing your loan application, lenders likely review your monthly debt commitments, not so much of your outstanding debt. This helps the lender compute your front end and back end debt-to-income ratio to see where that takes you as far as loan types. If you feel like your monthly debts are higher than you’d like, take a look and see if you are able to reduce anything through refinancing your current loans. Additionally, you could think about paying off a credit card or two to lower your monthly debts. Doing these actions can reduce your DTI ratios and increase your chance of approval, even if you have mounds of student loans.
The down payment is another factor lenders consider besides student loan debt. The amount you put down on your loan will affect your front end ratio. This means the more you are able to put down, the less likely your student loans will affect your chance of loan approval. With FHA loans, you are able to put as low as 3.5% down, and with conventional the limit is 20% down.
Income is a large factor in determining your eligibility for a home loan. Your lender wants to make sure you are fully suited to pay a mortgage every month and your income can support this amount. Despite having student loans, having a degree and a steady job suggests you’ll be able to pay your mortgage back successfully. Additionally, it is wise to keep a job for at least two years when applying for a mortgage. This shows steady work history and gives the lender confidence in your income. If you absolutely have to change jobs in the middle of your loan application, talk with your lender about the best steps moving forward. You don’t want this to get in the way of your loan closing on time!
Credit score is another important factor lenders consider besides student loan debt. When it comes to buying a home, the higher your credit score, the lower the interest rate. Talk with your lender about ways to increase your credit score before actually applying for a home loan. The good news is student loan debt is not usually included when calculating your score since it’s seen as a safe personal investment.
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