Can I Buy A House With Student Loans
Douglas Boneparth, president of Bone Fide Wealth and co-author of "The Millennial Money Fix," managed to buy a house in 2016, even though he and his wife had more than $300,000 in student loan debt. To put their debt in perspective, the average student loan balance is $38,792, according to credit reporting agency Experian.
can i buy a house with student loans
Your student loan debt might not be the only stumbling block to saving for a down payment. If you have high-interest debt such as credit card debt, you need to focus on paying that off before you start saving to buy a house, said Carla Dearing, partner at Velo Group.
You might be able to reduce your monthly payments by refinancing your student loans at a lower interest rate. Boneparth refinanced his federal student loans, which had an average rate of 6.8%, with a private loan that has a fixed interest rate of 2.95%.
If you have federal student loans, you might qualify for a program that will help reduce your monthly payments so you can save more. For example, if you have several loans, student loan consolidation can roll them all into one and reduce your monthly payment by giving you a longer period to repay them.
Your goal should be to save enough to make a down payment equal to 20% of a home's purchase price, Dearing said. This will help you avoid having too much debt for your income level -- which might make it hard for you to pay your student loans. And it will help you avoid private mortgage insurance, which you must pay in addition to your mortgage if you put down less than 20% of a home's purchase price.
Boneparth, who bought a house in New Jersey close to New York City, was able to get a mortgage with a competitive interest rate without PMI even though he put down just 10%. Having a high credit score helped him get such favorable terms, he said.
As Boneparth pointed out, making sure you have a good credit score can help you avoid PMI and get a good interest rate on a mortgage like it did him. The credit score you need to buy a house will vary from lender to lender and the type of loan for which you're applying. However, a credit score of 760 or higher will improve your chances of getting a mortgage with a lower rate.
Conventional loans aren't the only way to buy a home. Instead, consider a government-backed option, such as an FHA loan, which requires as little as 3.5% down and which you now may find it easier to qualify for with student loan debt.
Under FHA's old 1% rule, a borrower with an average student loan debt of $38,792, would have their debt obligation calculated at $387.92 if their actual student loan payment was less because FHA used the greater amount to calculate a borrower's monthly student loan debt obligation.
Now, the FHA must use either the borrower's student loan payment reported on his or her credit report or the actual documented payment -- as long as the payment is above $0. If the borrower's payment is $0, FHA will calculate the monthly payment as 0.5% of the outstanding student loan balance. For a student loan balance of $38,792 with a payment of $0, the FHA would calculate the monthly debt obligation as $193.96 -- or half of what it would have been under the old rule.
A good rule of thumb to determine how much house you can afford is to plan on buying a home that costs no more than two to two and a half times your income, Dearing said. "In parts of the country with very high real estate valuations, you can go as high as three to three and three-quarters times your income."
Additionally, the program provides financial assistance worth 15% of the home purchase price -- up to $40,000 -- to help borrowers pay off their student loans. Restrictions do apply, such as you must have at least $1,000 in student loan debt and plan to live in the home for at least three years.
A smaller mortgage and lower maintenance and utility costs also mean that tiny living can help accelerate debt repayment. You'll have more money at the end of each month to pay off your student loans faster.
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For many Americans, student debt is an obstacle to homeownership. In a survey of 1,000 undergraduate students, our friends at the Clever Data Center found that undergraduates with student debt are pushing back plans for homeownership by seven years.
In 2017, Fannie Mae changed how it looks at student loan debt. If your loans are deferred or in forbearance, you can qualify by paying just 1% of your total balance. Borrowers who are on an income-driven repayment plan can also use their actual monthly payments to qualify for a mortgage.
Your credit report includes your student loan balance and payment history, according to the Consumer Financial Protection Bureau (CFPB). Building a good credit history is important, as it can help you qualify for a mortgage with lower interest rates.
Before you start house hunting, get pre-approved for a mortgage, which means your lender determined you qualify for a loan up to a certain amount. You can then shop for homes with confidence, knowing that there will be no surprises when applying for financing.
Some mortgage programs have more flexible requirements. For example, an FHA loan could qualify you with a DTI up to 56.9%, and a VA loan can get you into a house without a down payment. Just know you might be on the hook for extra mortgage insurance.
Mike, a government worker in Yukon, Oklahoma, said banks offering loans would line up at his law school at the University of Toledo. (He asked to use his first name only because of his job with the government.) He graduated in 2008, with more than $200,000 in debt, into the Great Recession.
Fortunately, owning a house will not impact your monthly student loan payments on an income-driven repayment plan, said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that helps student loan borrowers with free advice and dispute resolution.
Your student loans are part of your debt-to-income (DTI) ratio. Lenders do look at your DTI as one of the factors in qualifying for a loan. If you have a hefty amount of student debt, taking on additional debt, even in the form of a mortgage, could put you are risk for defaulting on either loan.
It isn't advisable to use student loan money for anything other than your educational expenses. If you are reported to the U.S. Department of Education, you could be ordered to repay your student loans immediately. And lenders will ask you to document your financial records, i.e., an influx of cash from a student loan will probably be examined by the underwriters.
This post will explore the different strategies on buying a house with student loans and the advantages and risks of each. Because there are many factors that go into this decision, the goal is to help give you some tips so you can identify the strategy that best aligns with your goals.
Regardless of the strategy you choose, buying a house with student loans is a big decision and you need to be ready to take on that responsibility. Certainly, you have to have your finances in order to make it happen, but you also want to be emotionally prepared. That means being on the same page with your spouse or significant other and being able to devote time and energy to the entire process. That also means having your priorities and goals in place. Before getting into the numbers here are some key questions to answer:
Remember, the bank will not extend a loan that requires payments in excess of the 36% rule maximum of $3,450 each month. Your total debt payments each month with student loans and car payment currently sit at $2,125.
If the thought of your student loans makes you sick to your stomach, adding more debt by buying a home may be the last thing on your mind. This strategy focuses on paying off your biggest debts before adding more to your plate. This is the true Dave Ramsey philosophy and is a strategy for people who can handle delaying their gratification.
The tradeoff is you will miss out on the benefits of being a homeowner until later. Namely, building equity and tax benefits. Interest rates are also increasing at the moment and if trends continue, they could be significantly higher in just a few years. Missing out on a lower interest rate now could mean spending quite a bit more down the road. Plus, depending on the size of your student loans and potential mortgage it could take several years to clean that up and then save enough for a down payment.
The third and final approach attempts to mix the best aspects of the initial two. The basic philosophy is this: Pay off a portion of your student loans and lower your debt to income ratio, save up a sizeable down payment, and buy a home when you are more financially stable.
If you use this approach, what percentage of your student loans should take out prior to pulling the trigger on a home? It really comes down to what your comfort level is and how long you want to delay the homebuying process.
Buying a house with student loans can certainly feel overwhelming. There are emotional and financial points to consider that are often at odds with one another. There are three basic strategies to consider and what works best for you will be dependent on your situation including your priorities, emotions, financial position, and risk tolerance.
Have more questions about buying a home with student loans? Nate Hedrick, the Real Estate RPh, is a full-time pharmacist and licensed real estate agent. Head on over to yourfinancialpharmacist.com/real-estate to get in touch!
Potential home buyers often wonder whether they should pay off their student loans or buy a house. There is no right answer here, especially because the amount of debt you have, how quickly you can pay it off, and the type of home you want to qualify for all impact this decision.
If you have deferred student loans - which means that you are back in school, in the military, or can demonstrate economic hardship (federal student loans were also deferred for 2020/21 due to COVID) - you may be wondering how this impacts your ability to buy a home. 041b061a72