Waiting for the impending federal student loan bubble to burst has homebuyers anxious. Who wants to think about balancing mortgage payments with monthly deposits toward a student loan?
In 2015, the National Association of Realtors published a report that unpacked some of the fears of homebuyers, chief among them student debt. According to the report, a massive 68% of buyers in 2015 were millennials (those born between 1980 to 2000). In that age group, a staggering 54% claimed that student loans were a main factor preventing them from buying a home.
Learning How to Manage Your Debt-to-Income Ratio.
A common fear about student loans is that they will bring down an applicant’s debt-to-income ratio (DTI), which lenders review to see if you qualify for a mortgage. The DTI is comprised of two factors:
–Front-end ratio: The percentage of yearly income consumed by would-be mortgage payments. (Lenders want a number lower than 28%)
–Back-end ratio: The percentage of yearly income eaten up by all debt burdens. (This number can be as high as 43% in some cases, but it is generally better to keep your number lower than 30%.)
For potential buyers with large student loans, the DTI can look like an obstacle, even with a perfect FICO Score. There are, however, ways to move around your debt and restructure loans so that your DTI number is not so significantly affected. The quickest way to lower your DTI is to lower the monthly amount you spend on student loans. Additionally, federal student loans allow you to choose an income-driven payment plan that generally takes 10% of your discretionary income. Refinancing student loans will also help net you a more competitive interest rate that will lower your long-term debt.
When looking to refinance your student loans, it is important to look at the greater financial picture, to look into savings, planning, and family support.
Affording a Down Payment.
Another huge worry, especially for first-time homebuyers, is not having enough money for a down payment. Here, savings are key and most professionals recommend saving around 20% of a home’s price. There are (like always) a few exceptions to this rule. An FHA Loan can help first-time buyers and senior citizens alike to lower down payments to as low as 3.5% of the purchase price. And if you are a veteran, the federal government offers a VA loan that can essentially extinguish the cost of a down payment to 0% of the purchase price.
The Big Picture.
When it’s all said and done, no one wants to be house poor, funneling the majority of earned wages into a home without any money to spend elsewhere. Many first-time homebuyers receive monetary gifts from family members to afford their first homes, which can help improve your chances at a purchase. Ultimately, though, student loan interest rates are relatively low and less threatening than other type of loans.
In case you’re still thinking about whether or not to refinance your student loan, here is a quick list of decision making points:
- Does your DTI look good?
- Are you able to save up for a down payment or get it reduced?
- Can you handle the additional costs of home ownership such as utilities and repair?
- Do you know where you want to be for the next 5 to 10 years?
Filed Under: mortgage monday