In the United States alone, the collective student loan debt is over $1.5 trillion and rising each year. According to the Federal Reserve, every $1,000 a person has in student debt could delay homeownership by almost 2 months. More than 50% of millennials either have or know someone with student loan debt.
While this high number of student debt is making it hard for many adults to purchase a home, homeownership with student debt IS POSSIBLE! It most likely is not realistic to wait until student debt is paid off before becoming a homeowner, so here are three ways to help you reach your homeownership goals.
Build your credit score
When applying for your mortgage, your credit score plays a big role in your interest rate. It helps to build your credit score and having a long credit history can be helpful. You should, if you haven’t already, get a good credit card and pay it off every month. Paying on time will start building your credit score. Try using it just to pay a specific bill like a phone or an internet bill. When your student loans come in, be sure to pay them on time too, this will let you build a positive credit history. Want more ways to raise your credit score? Set up a time to work with our Financial Coach who can guide you with one-on-one coaching.
Decrease your debt to income ratio
Most lenders use a 28/36 ratio, this means that what you’re paying for a home should not be more than 28% of your gross income and your overall debts shouldn’t be more than 36%. If you add the potential monthly housing payment and your other monthly debt, you can see the likelihood that you could get approved for a mortgage. If the ratio is too high, don’t worry, there are two ways to decrease the ratio, either increase your income or decrease your debt. Try consolidating loans or use an income-based repayment method.
Save for your down payment
Whether your homeownership goal is close or distant, it is never too early to start saving. If your goal is distant, try setting aside ten or twenty dollars a month. If you are closer to homeownership, consider a Down Payment Assistant Loan.
Managing your student and home loans might seem hard, but it is important. So, if you don’t know where you want to settle down and are simply looking for a starter home, then consider whether homeownership is truly the right move for you at the moment. Here are a couple of other things to consider as you look at your future finances:
It combines all your loans into one, this means only one monthly payment. This can occur either federally through the U.S Department of Education’s direct loan consolidation program or through a private lender.
One benefit of owning a home is having price appreciation. It helps build home equity, this is the difference between the market price and remaining mortgage payments. It doesn’t directly pay off student loans but it will help in the long run, as it increases the asset value. The Federal Housing Finance Agency website has tools to help give an estimate of the house’s value based on average rates of appreciation.
Student loans can leave you feeling overwhelmed and hopeless. But there is hope! Even with large student debt, homeownership is possible. Our mission at NWWVT is to help you achieve successful and sustainable homeownership through education and services. Call today at 802-438-2303 to schedule an appointment or learn more about our classes and services on our website at www.nwwvt.org.
Author: Bailey Aines, part-time NWWVT employee.