How Should I Purchase a Home if I have Student Loan Debt?

Student Loan Debt

The student loan debt crisis has spiraled out of control. Millions of recent graduates are struggling to make ends meet with jobs that offer incredibly low starting salaries and costs of living that are rising all across the nation. As a result, many new graduates feel that their dreams of purchasing a home are too far out of reach.

Luckily, those that are navigating a mountain of student debt while looking to buy a home have some options available to them.

The Issue of Debt-to-Income Ratio

Applying for a mortgage is a stressful process. Further complicating the matter for new graduates is the fact that lenders often consider an applicant’s debt-to-income ratio more heavily than almost any other factor.

Debt-to-income ratio is fairly intuitive and can be understood from the name itself. Essentially, it is number that demonstrates how much a person owes in credit card debts, school loans, etc. vs. how much they make each year in salary.

For recent graduates, debt-to-income ratio is difficult to improve due to a number of reasons.

First and foremost, employers that hire new grads often see the employee as a risk. There’s no telling whether or not this new grad will be a good worker in this position, as this is likely their first time working in a full-time capacity. Therefore, businesses will often see no problem with offering new graduates less in compensation.

Secondly, as was discussed earlier, new graduates often have significant levels of debt due to their student loans.

Taken together: companies feel justified in paying new graduates less, and new graduates owe a ton of money in student loans. This combination reflects unfavorably on their debt-to-income ratio.

Improving Debt to Income Ratio

Fortunately, there are ways to improve debt to income ratio for those with crippling student loan debt.

A few methods of improving an applicant’s chances of receiving a good mortgage offer is for them to refinance their loans and to pay off any debt they may have, such as a credit card. Taking these steps, however small they may be, will show lenders that the applicant is trying to improve their financial situation.

Another option stems from a recommendation made by Fannie Mae, the government loan assistance program. Fannie Mae recommends that applicants use what is known as “debt paid by others” to improve their mortgage application.

Essentially, this means that family or friends can assist the mortgage applicant by helping pay off some of their car loans or other debt. This “debt paid by others” will not count against the potential homebuyer, and can significantly improve their application status.

A Mortgage Professional Can Help

Throughout the homebuying process, many questions will come up. Some applicants may even question if it’s worth it to attempt to purchase a home in their current financial state.

But regardless of an applicant’s income, debt level, or any other factor, qualified mortgage professionals, like the ones at Rex Homes, can help. These experts in the housing field know everything there is to know about the mortgage and homebuying process, and they are ready to help you today!