Let’s say you’re a recent college grad. You’ve landed your first real job (or maybe you’ve been working it for a while already) and after years of dorms and apartments, you’re realizing you might as well start building equity in a place of your own.
You wouldn’t be alone. Though you’ll see articles all over the place insisting that millennials just aren’t interested in buying homes, a closer look at the data says the opposite is true actually true.
However, there’s one small hiccup: student loan debt. In 2013, the average student borrower graduated $28,400 in debt, which will almost certainly lead to problems when they try to qualify for a mortgage. So what can you do if all this describes you?
First, let’s take a closer look at the why of this problem.
How does student debt interfere with getting a mortgage?
When lenders do all the math to figure out whether or not you’ll be able to make your monthly payment, they take special care with something called a debt-to-income, or DTI, ratio.
This is almost exactly what it sounds like—it allows banks to get a feel for how much of a borrower’s income is already accounted for by other debts. Ideally, your DTI ratio should be 43% or below, as that’s the cutoff point most banks will use.
Even if your loan is still deferred, which means you haven’t begun payments on it yet, lenders will still estimate monthly commitment from you, though it may be even higher than the standard minimum payment.
What can you do?
Well, there’s the obvious, solution: pay down your debt before applying for a mortgage. Of course, obvious doesn’t always mean easy. Paying off your student loans will take time and careful budgeting, especially if you’re trying to save up for a down payment at the same time. That may mean some serious cutting back on living expenses or avoiding big purchases.
Of course, the other way to improve your DTI ratio is to increase your income. Earning a raise, moving on to a better paying job, or even taking on a part time one are all ways to do just that. Make sure you do so several months before applying, though, or your lender may not count the income.
If neither of those options work for you, you can always try to consolidate your student debt, or convince a parent to co-sign with you. Whatever you do, though, make sure to keep your credit in good standing, or you’ll have to add “bad credit” to your list of problems to fix.