Let`s answer to how your student loan debt will affect your ability to get a mortgage? In this article we will try to show some tips to have more chances to be qualified for mortgage in lenders view.
How to get a mortgage?
But before going into our main question, let`s take a look on the process you will go through to get a mortgage.
The first step is to get prior authorization. The pre-approval letter is a document that proves that you are a suitable candidate for a mortgage based on the information you have provided to the lender. Your lender will ask you for financial documentation and permission to review your credit report. This will inform the lender of your current student loan balance.
Most pre-approvals also include the amount of the loan you are eligible for and the estimated amount of your monthly payment. Prior authorization is very important because it will help you buy homes within your budget.
Insurers will review your:
- Current debt
- Credit rating
- Unusual activity on recent transactions with your bank account
- Other assets you have
After all of your documentation has been reviewed and the home has been assessed at the required value, your lender will provide you with a document called Closing Disclosure that details the final terms of your loan and your closing costs. From here, all you have to do is confirm the disclosure, attend the closing meeting, and sign the loan.
How Student Loans Are Viewed By Lenders
To be qualified for getting mortgage you do not need to be 100% free from debts. For lenders, the first thing which they considering before giving loan is your current debt, any associated with your student loan. It is important for lenders to know whether you have enough money or not to make payments after your receive a mortgage. As a result, more debts you own, more likely you will not be able to make a payments.
When lenders considering loan they looking at your debt-to-income ratio. This ratio shows a percentage of your monthly income that goes toward debt. Having high DTI ratio, less chances to get a loan.
Should You Pay Down Your Student Loans Before Buying A House?
Before buying home should I pay off my student loan? As we mentioned earlier, first look at your DTI ratio. Lenders care more about debt that you have comparing with your total income. In case you have reliable income to ensure that you will make payments. If your DTI is more 50% then pay attention on paying off your loans before you buy a house.
Before considering a buying home look at other area of your finances. You can wait until you create a fund if you have an acceptable DTI but no reserve fund. Likewise, if your student loan repayment prevents your pension contributions from being paid, wait to buy a house until you have paid off most of your debt. Also keep in mind that most mortgages require a down payment when buying a home.
Last step look at your interest rate. Let`s say, you have high interest rate on your student loans, and it will cost higher over time. Therefore, before investing in a home, pay off more of your high interest rate loans. If your payoffs are low, but you don’t pay enough to cover the interest charged each month, you are actually getting deeper into debt. In this situation, you should pay more than the minimum you set and focus on paying off the loans first before taking on additional mortgage debt.
Few steps that you can take to improve your chances of qualifying
Research all loan types
You cannot qualify for a regular (conventional)loan if you have a DTI above 50%. A regular loan is a mortgage that follows the guidelines set by Fannie Mae and Freddie Mac that standardize mortgage lending in the United States. However, you can still buy a home with a government-backed loan. These loans are insured by the federal government, which reduces the risk of losses from default. This allows mortgage lenders to issue loans to borrowers with a lower DTI.
You may also want to consider an FHA loan that is supported by the Federal Housing Administration. At most cases 57% is the maximum DTI for an FHA loan.
Close another debt
Paying off your other debts, will lower your DTI and frees up more cash flow.
Increase your income
Another way how you can lower your DTI is increasing your income. Extent your working hours or other ways for increasing your income. But do not forget, that this extra income has to be proved as regular, steady income, so it will have effect on your DTI ratio.
At the end of this article, we would like to note, that buying home you do not need to be debt free. Calculate your DTI ratio and keep it low so to have more chances to get a mortgage. In case your DTI is high, pay off your other debts.
Make sure, that you have steady income, and your financial situation is stable before your decide to invest in home.