6 Factors You Need to Think About Before Buying a Home with Student Debt
So you want to buy a house but you have a little thing called student loans weighing you down. Buying a house, with or without this added obstacle, is a large financial decision that shouldn’t be taken lightly. If you have student loans though and are seriously interested in purchasing a home, consider these 6 factors first to find out if you’re ready.
1. DTI ratio
One of the factors lenders consider when approving people for a mortgage is their debt-to-income (DTI) ratio. Your DTI is calculated based off your monthly income and total debts you have, like car payments, and student loans.
Most lenders want you to have a DTI of 43% or less which means if you exceed this number, it may not be the right time for you to purchase a home. In this case you’ll need to decrease your debts or increase your income, but make sure to talk to a lender before writing off the possibility of owning a home.
2. Credit score
Another item lenders consider is your credit score. If you have a decent credit score you may be in a good situation if your other items, like your down payment, and DTI line up.
If you’re not sure what your credit score is, you can request a report for a minimal fee from Equifax, Experian, or Trans Union once a year. Additionally, if your score is lagging, don’t opt for quick fixes, instead, improve your credit score over time.
3. Down payment amount
How much have you saved for your down payment? Nothing or only enough to completely wipe out your bank account? If so you should probably wait until you save more money.
If you have some, and you’ll still have money left over for emergencies and repairs, then you could potentially make it work. There are loan programs available allowing as little as 3.5% down. The more you can put down though the lower your monthly payment will be and potentially the interest rate.
4. Monthly expenses
In some areas the cost of owning and building equity is better than renting. However, in other areas you might not be able to find a home in your price range allowing you to put a minimum amount down and still end up with a similar or lower monthly payment than renting. Not to mention the extra monthly costs that accompany home ownership.
When you’re factoring in the cost of living, don’t just calculate what your monthly payment will be and call it a day. Remember you’ll be responsible for repair costs, upgrades, and utilities like electric, trash, and water. If you’re not financially ready to handle these additional expenses because of your additional student loan payments, renting may be best.
5. Current and future life situation
If you’re not sure where exactly you want to be in 5-10 years, and you’re already dishing out monthly payments for loans, adding on an additional mortgage payment may not be the right choice. Especially if you haven’t been out of college for too long and need the flexibility to move.
6. Quantity of loans and interest rate
An important aspect to consider when deciding to purchase a home with student loan debt is how many loans you have and at what interest rate. If your loans have a relatively low interest rate it makes sense for you to at least consider the possibility of owning a home.
If your interest rates are on the high end, it might make more sense to allocate your extra funds to decreasing those first and saving for a larger down payment.
Living at home isn’t so bad
Although living at home may not be your first choice, it may make sense for you financially right now. It’s alright to take some time to save and get your feet on the ground before making a life changing decision like buying a home. Trust us, living at home isn’t so bad when compared to being house broke.