Let's get real for a minute. Student debt can be rough. Education is so important and having a degree can be invaluable, but it can also lead to many, many years of debt. Particularly when you go to a private institution--I love you, LMU, but your tuition has put many of my friends $100K+ in the hole! With that debt, regular monthly costs, and rent payments, how are millennials supposed to build equity? Luckily, purchasing a home doesn't have to be merely just a dream, and I'm here to show you how you can do it.
First and foremost, you'll need to know the standard steps of purchasing a home. In many ways, purchasing a home when you have student debt is no different! For instance, your credit score will be checked either way. There are many online tools you can use to check your credit score, or you can get a credit analysis done by your banker. You'll still have to apply for your loan, find a Realtor, view properties, make an offer, and go through Escrow.
The main difference when you have student loans is that the debt will be reflected in your debt to income ratio.
Debt To Income Ratio=All Debts/All Income
Most lenders will want to see a Debt to Income Ratio of 45% or better. NOTE: Your mortgage payment, interest, taxes, and home insurance are a part of your debt. So, add the mortgage PITI (payment, interest, taxes, insurance) to all of your other debts to comprise the "debt" portion of the equation. Your student loans are a part of this debt, whether they are currently deferred or not.
How Can I Work With My Debt to Income Ratio?
Aim For A Lower Monthly Payment:
You can get a lower monthly payment by picking certain home options and loan options. Perhaps a condo or townhouse would suit you well at this point in your life, and you can upgrade to a fully detached home down the line. Another option is to talk to your lender about certain loan programs, such as 5 or 7 year fixed loans, rather than 30 year fixed. They may be able to offer you lower monthly payments (thus making it easier for you to qualify).
Reduce Your Debt:
Consider your close-ended debts, such as car payments (they have a definite end date if all payments are made on time). Some lenders will reduce or remove the debt you owe from the equation if you have 10 or fewer payments left on the loan (this does not apply to leases!) Talk to your lender about whether you have close-ended debt that can be paid down.
Open-ended debt, such as credit cards, are trickier, because there is no end date to the debt (you can keep acquiring more). In some cases, paying down credit card debt will help, but in other times, it will hurt your mortgage application. I strongly recommend speaking to a lender about your particular situation!
An additional option to consider would be to transfer your student debt from a public loan to a private loan. Perhaps someone in your family can take on your loan, allowing you to repay them at a lower interest rate. This absolutely must be disclosed to the lender!
Increase Your Income:
Raises and promotions at your job are great and will certainly benefit you! However, in terms of adding an additional job to qualify for a loan, you usually need to show at least 1 year of employment history (2 years is better) in order for that income to qualify. So, no, you can't do a ton of chores for your parents for a month and make $1,000 and add that monthly to your monthly income. :) Another way to add to your income portion of the equation is to add someone else on your loan. If this person is willing to be on the loan for you, you may be able to qualify more easily. Keep in mind, though, that this person's income may allow you to qualify for a loan amount that will be difficult for you to pay on your own. The debt to income ratio is in place to protect the lender as well as the consumer!
People with student debt qualify for home loans every day! Owning a home is a great way for you to start to build equity, and in many cases, your mortgage isn't much more expensive than your current rent (check out my mortgage calculator). As always, I am here to assist if you have further questions!