Should You Buy A Home While Having Student Debt?
Are you one of the 43% of college-educated Americans who are considering postponing your dream of home ownership to repay your student loans? Applying for a mortgage and signing up for all the costs that come with owning a house can be daunting when you are already carrying hefty student debt.
So, should you buy a house while paying off your student loans? Like many other financial decisions, the answer is not cut and dry. Here is a list of the different things to consider before making this life-changing decision.
- What is your credit score?
Your credit score is the first thing a potential lender will look at. It will determine what interest rate you will pay and if you can be approved in the first place.
If your FICO credit score is at or below 650, now is not a good time to buy a house. Spend this extra time by working on raising your credit score by making regular payments on time and reducing your overall debt by making payments above the minimum due.
If you have an excellent credit score (740 or above), your dream of buying a house might be within your reach.
- Is your debt-to-income ratio reasonable?
Another element mortgage lenders take into consideration when considering your application is your debt-to-income ratio (DTI). It is calculated based on the percentage of your income dedicated to debt repayment, including student loans. As a rule of thumb, lenders want you to spend 28% or less of your gross monthly income on houses expenses and 36% or less on debt repayment, including your future mortgage and your current student debt.
If you are starting your career or going through a rough patch, your DTI might be too high and now might not be the time to buy a house. Consider earning a side income to reduce your current debt or consolidating it to lower your monthly payments.
- Determine how much house you can afford before going house hunting
A lot of people make the mistake of going house hunting first and realize too late that they do not qualify for the amount necessary to purchase their dream home. Avoid the heartache by getting pre-approved by a lender before falling in love with a house.
Not only you will have a realistic expectation on your budget, but the closing process will be a lot faster and smoother.
- How will you pay your down payment and closing costs?
Your DTI is low, your credit score is high, and you have been pre-approved. Now what? You will need to have cash available upfront. A conventional mortgage usually requires a 20% down payment, and you will have to pay between 2 and 5% of the purchase price of the house in closing costs.
However, you might qualify for government back mortgages like an FHA, USDA or VA loan. Keep in mind that a lower down payment is usually synonymous with having to pay private mortgage insurance (PMI) which will affect your monthly payments.
- How will owning a house affect your lifestyle?
If you are a first-time homebuyer you may forget that buying a house comes with many financial obligations that go beyond a simple monthly mortgage payment. Although you might qualify for a mortgage, you will also have to consider fees such as real estate taxes, homeowner insurance, homeowner association fees, and general maintenance.
Avoid becoming house-poor by taking an honest look at your budget. If it does not leave much room for unexpected issues after minimum student dent and your mortgage payment are made, now is probably not a good time to buy a house. It is more prudent to wait until your revenue increases or your student loans are paid back.