Many student loan borrowers struggle to make the leap to homeownership due to fears about financing a home. Many times over, we at True Homes have seen that student loan debt does not have to be a hindrance to homeownership dreams. Here are some financing tips that may help get you into your next home.
How Student Loans Affect Home Financing
Student loans impact home financing in two primary ways—your ability to qualify for the loan amount you want and your ability to save up for a down payment.
When you finance a home, lenders will look at your debt-to-income ratio, or DTIR, to determine how much money you may borrow. This is the percent of your income that goes to paying off debt each month. If you’re making high student loan payments, you’ll have less to spend on a mortgage payment.
Most loan programs will allow DTIRs of up to 43%, including your payment for housing. To determine your total “allowed” amount of debt, multiply your gross (pre-tax) monthly income by 0.43. For example, if you make $48,000, your gross monthly income is $4,000. Multiply that by 0.43, and you’ll see that you have an available $1,720 per month to spend on debt, including your mortgage.
Now, add up your current monthly debt obligations—the payments for money you’ve already borrowed. For most families, these include car loans, student loans and credit cards. You do not need to include utilities, insurance, or childcare, though any court-ordered costs such as child support payments are counted.
Let’s say you have the following payments:
Auto Loan $300
Student Loans $200
Credit Cards (monthly minimum payments) $100
Your debt payment total is $600
Subtract that from the $1,720 you have available in your budget to spend, and you have a remaining $1,120 to spend on a mortgage payment.
If your student loan payments are non-amortizing (you aren’t on a regular payment program), the lender may be required to calculate your payment into your DTIR differently. However, rules regarding this changed in the summer of 2021. If student loans kept you from qualifying before, it’s time to try again!
Consider Changing Your Student Loan Financing
Financing tips for impacting your DTIR include paying off credit cards or auto loans, particularly high interest rate debt, and increasing your income.
Another step you can take is to consolidate multiple student loans into one larger loan, particularly if you can refinance to a lower interest rate. The resulting lower monthly payment will free up more of your income to pay for a mortgage.
You might also lower your monthly debt obligation by financing student loans into a longer repayment period. If you don’t actually want to take extra time to pay off your student loan debt, that’s okay. You can still pay extra each month to pay it off on your original schedule.
Look for Low or No Down Payment Loans When Financing Your Home
If your student loan payments have kept you from saving up for a down payment on a home, don’t give up hope. Veterans Administration loans and USDA loans for rural properties offer $0 down payment programs. Before you discount those options, take a closer look. In some cases, USDA considers popular suburbs as “rural.” You can check availability here.
Many lenders have special financing programs for first responders, teachers, and healthcare professionals, too. Even conventional loans can provide home financing with just a 3% down payment, no special programs needed.
It’s important not to “assume” you don’t have the means to purchase. Talk to mortgage lenders to see what they may have available for your scenario.
Financing a New Home Saves You More Later
Many home financing tips get you to the closing table and leave you there, but it’s important to think past the mortgage payment. When you become a homeowner, you’ll take on the added expense of caring for your home, too. Even if those costs don’t impact your home financing, they’ll affect your stress level after you move in!
At True Homes, our “Make-You-Smile” home prices offer quality and style at price points not typically found with other builders or existing homes. That means you’re less likely to spend extra time and money making changes to get the home just like you want it after you move in.
With our True Green commitment, you’ll also save on energy costs. Our homes are 40% more efficient than the typical existing home. We score considerably better than typical new construction homes, too.
And finally, with True Homes’ commitment to quality, you’ll spend less on repairs and replacements when you buy with us.