How To Buy A Home With Student Debt
According to the National Association of Realtors a whopping 24% of new home buyers shared that they are saddled with student debt and according to credit.com, the average student debt amount is $31,172. This is definitely not chump change an depending on the interest rate, amount paid per month, and any deferments granted, this can balloon well passed this. Worry not though, if you’re thinking of buying a home and aren’t sure if you can afford it, there are solutions and options for you. In this weeks blog post, we will be going over 5 easy steps that you can take to prepare you for home ownership without having to pay off your student loans completely to zero.
Step 1: Improve Your DTI
Your Debt-to-Income ratio (DTI) is your is a personal finance measure that compares an individual’s monthly debt payment to his or her monthly gross income. The calculation for this is as follows:
DTI=Total of Monthly Debt Payments/Gross Monthly Income
Sum up your monthly debt payments including credit cards, loans, and mortgage.
Divide your total monthly debt payment amount by your monthly gross income.
The result will yield a decimal, so multiply the result by 100 to achieve your DTI percentage.
A low debt-to-income (DTI) ratio demonstrates a good balance between debt and income. In other words, if your DTI ratio is 15%, that means that 15% of your monthly gross income goes to debt payments each month. Conversely, a high DTI ratio can signal that an individual has too much debt for the amount of income earned each month. Most lenders want to see a DTI no higher than 36% with no more than 28% going towards rent or mortgage payments. At American Freedom Funding we have programs that can allow for DTI ratios as high as 46%! Let’s face it, living in California is expensive and we need to be more realistic with the costs of daily living.
That being said, lowering your debt to income ratio is an easy and manageable way to improve your chances of getting approved for a loan. Paying off any credit card debt can free up more of your income to go towards a mortgage payment. The strategy you use to accomplish this can vary but we are fans of not paying more in interest so we suggest tackling your highest interest rate credit card first, and then focusing your energy on the second highest and so on. This will save you from having to pay interest over time. The less debt you have under your name the better.
Step 2: Consider Your Down Payment
The down payment is one variable in many that pretty much dictates whether or not things keep moving forward. The down payment can range from 3.5% of the value of the home all the way up to 20%. Since we are in California, the cost of housing can make it difficult to save up to 20% down and it is more likely that it will be less than that. Fear not, the government and most counties provide programs that direct lenders like us can utilize to help you get into a home without having to save 20%. There are several sources for the down payment;
Saving up the old school way
A Gift from relatives
Down Payment assistance programs
The reason the options aren’t as plentiful is that the down payment should be a source of the buyer’s dependability in regard to the capacity to purchase. It allows the banks lending the money to purchase a home a better feeling as to the likelihood of the loan being paid back. As a buyer, if you do not have ALL of the down payment, it is possible to receive a Gift from family bestowing you funds to make up what you need. It is very important that the down payment be ready before the house hunting process.
Step 3: Raise Your Credit Scores
This is pretty self explanatory. The better your credit scores the better the interest rate the less you have to pay per month. This is also easier said than done. You want to be methodically and strategic in your efforts to get a better score. Start off by paying your highest interest rate credit card first to save you more in interest over time. Once you have that paid off, move on to the next highest interest rate credit card until you’re in a better score. The idea is that you want to lessen the burden of credit cards since those are the simplest and fastest ways to lower your scores without having to touch your larger student loans.
Step 4: Get Pre-Approved Before Looking For A House
These days, an offer for a home means nothing without a Pre-Approval letter from a lender. A Pre-Approval letter is basically a letter stating that you have undergone 90% of the application process and all you need left is a home to apply the loan to. Your credit has been checked, your financial situation has been vetted and verified, and you hopefully have a Realtor at your side to help you find the perfect home. Your Pre-Approval letter is the golden ticket you need to get your offer accepted. If you don’t have a real estate agent, give us a call, we’d be happy to refer you to several that we know would be perfect for you.
Step 5: Look Into First Time Buyer Programs
As your direct lender, we have access to a plethora of programs that are designed to help you get into a home. If you’re buying for the first time, the Government loves to help you out. Our most popular program is the FHA program. It offers the easiest guidelines, best rates, and lowest minimum down payment requirements. This would be your best bet in receiving the keys to your first home.
If you follow these 5 steps, your chances of buying a home without having to touch your student loans increase dramatically. If you still have questions, give us a call, we’d be happy to assist and answer them. You have American Freedom Funding at your side. We are here for you.