Does Student Loan Debt Affect Mortgage Approval?
Buying a home is one of the best investments you can make. That said, most people looking to buy homes are recently employed and are still paying off student loans. These can make it challenging to save for a down payment or secure a loan from a mortgage company. That is the reason why most millennials do not have their own homes.
That said, having student loans does not mean you cannot purchase a home. If you are wondering, "does student loan debt affect mortgage approval?" as mentioned above, it can. However, you can buy your own home by using the above tips to get your mortgage approved.
Improve Your Debt-to-income Ratio
The first thing you need to do to get a loan is to work on your debt-to-income ratio. A lower debt-to-income ratio improves your chances of getting a loan because it is the first thing that lenders look at before approving your loan request. Most lenders require a debt-to-income ratio of at most 28%. If you have a higher one, they will not approve your loan. In case you are wondering what the debt-to-income ratio is, it is the portion of your monthly income that goes into loan repayment.
If you are spending more than 28% of your monthly salary on student loans, mortgage companies will not approve your loan. Bear in mind that lenders require that your total debt-to-income ratio after mortgage be 36%. You can check your debt-to-income ratio using different online tools. These will ensure that you know whether you qualify for a loan. Here are some ways you can improve your debt-to-income ratio.
Pay Down Your Debt
Do your best to pay down your debt, as that will lower your debt and improve your Debt-to-income ratio. Pay your credit card bills, loan debts, and any other balances that you may have. You can use your holiday bonuses and tax refunds to pay down your debt. Bear in mind that even small payments make a significant difference.
Increase Your Income
You can talk to your boss to ask for a raise, get a side gig, or even a second job. These will help supplement your monthly salary and help improve your debt-to-income ratio.
Refinance Your Loans
Refinancing ensures that you make lower monthly payments and lowers the interest on your loan. That will reduce the total amount of money you have to pay every month.
Income-based Payment Plan
Income-based repayment plans ensure that you make payments based on how much you make every month. That makes the amounts more affordable for you. That type of payment lowers your costs to about 10-15% of your total monthly income.
Increase your Credit Score
Your credit score is an essential factor when it comes to getting a mortgage. Lenders will make use of your credit score to decide whether or not you are creditworthy. If you have a high credit score, you have a higher likelihood of getting your loan approved. You can improve your credit score by making your student loans payment regularly and on time. Here are other things you can do to improve your credit score
Lower Your Credit Utilization
You can lower your credit utilization by paying down as many of your debts as possible. For instance, if you have credit card debt, you can pay it down to improve your credit score.
Pay Bills on Time
Late payments affect your credit score. Your payment history contributes 35% of your credit score, so make sure that you pay all your bills on time every month. These bills include your rent, loans, and even gym memberships. If you keep forgetting, consider using autopay to ensure that you pay on time. Remember that late bill payment is likely to lower your credit score significantly.
Keep the Paid-off Account Open.
Your credit history matters, and the longer, the better. Bear in mind that credit history contributes 15% to your credit score. Long-standing accounts, when paid off, can go a long way in improving your credit score.
Avoid New Credit
Do not get new loans when you are preparing to get a mortgage. The new loans will adversely affect your mortgage approval.
Regularly Check Credit Reports.
Make sure that you regularly check your credit report. You can do that online and if you spot problems or miscalculations, ensure that you contact the credit bureau to get it corrected.
Get Pre-Approved for a Mortgage
It is always advisable to talk to your lender about pre-approving you for a mortgage. A pre-approval tells you how much money you are likely to get for your mortgage. That way, you can look for a home within your budget. Pre-approval lets the seller know that you are genuinely interested in buying the house. To get pre-approved will need to do the following things.
Give your lender information on your debts, income, employment, and past residence. Your lender will also want to check your credit.
Make sure that you find out what the down payment is. In case you are going to use gift money, make sure that your relative provides you with a gift letter.
You will also have to give your lender bank statements, pay stubs, tax returns, and W2s.
Remember to gather all these documents early to ensure that you are prepared.
Consider First-time Homebuyer Loans
There are several mortgage options for first-time homebuyers. These loans are offered by the federal government and the state government. They have low-interest rates, and most of them do not require borrowers to pay a down payment. Such a loan can be a big help, especially if you owe a lot of student loans. Federal home loan programs include USDA home loans and VA loans. State programs offer support with paying down payments and closing costs. You can find the ones available in your state at HUD.gov.
As mentioned above, you can get a loan even if you are paying student loans. Ensure that you take the above steps so that you get a mortgage to purchase your own home. Remember to be patient and keep working on your finances.