One issue millennials and young adults are currently experiencing is starting their adult life with student loan debt. The norm for this generation was to attend a college or university directly after high school. For those who go to college directly after high school, the student loan application is completed during their senior year of high school and they may not have realized exactly what the loan entailed as they are excited to experience a new independence. Currently, despite their educational achievements, many millennials have a hard time finding work directly after college due to a lack of work experience in that particular field. Applicants are often asked to have 1-3 years experience to apply for a position and their job search can begin to feel hopeless. Once a rewarding career is obtained, they may feel overwhelmed by their student loan debt and other life expenses. However, student loans do not have to prevent you from home ownership or achieving your real estate goals and dreams. If you are tired of renting and want to take steps toward owning a home of your own, here are some steps you can follow to help make your dreams come true.
Do some research
It is important that you are informed before you start looking for your dream home. Calculate how much you can afford for a monthly payment. Consider your salary, taxes, living expenses, student loan payment plan, and insurance into your calculations. Creating a monthly budget can also be helpful when deciding how much of a monthly payment you can afford.
Check out your credit score
Home lenders use FICO credit scores while making decisions toward your mortgage loan. Scores range from 350-800 and anything below 600 is considered to be poor credit. However, if your credit sits within the poor range, all hope of home-ownership is not lost. You may still be able to get mortgage financing and credit scores are never permanent. Make a few financial adjustments and you may be able to improve your score enough to fall into a better credit range. Consistent and on-time student loan payments will help build your credit and increase your score. Other ways to help increase your credit score include:
- Lowering your credit utilization
- Paying your bills on time
- Keep paid-off accounts open
- Avoid new credit lines
Improve your debt to income ratio
Improving your debt to income ratio is one of the best things you can do to improve the chances of getting approved for a mortgage loan. To calculate your debt to income ratio, you would need to divide all of your monthly debt payments by your gross monthly income. Most lenders prefer a debt to income ratio of 43% or lower. However, there may be some cases in which your lender will make an exception to a higher debt to income ratio percentage.
Get pre-approved for a mortgage
Once you believe you have a credit score and debt to income ratio that will qualify you for a mortgage, contact a lender to get pre-approved for a mortgage prior to beginning your house hunt. When applying for a pre-approval, you will need to provide information regarding your income, debt, past residences, employment, down payment offer, and documentation (paystubs, bank statements, W-2s, and tax returns). Your pre-approval will let you know how big of a loan you will qualify for and this will aid you in your home search.
Apply for down payment assistance
Student loans can make saving for a down payment difficult and you may not have any gift money from family. However, you can still receive assistance with your mortgage down payment. There are several down payment assistance programs that may help cover your down payment in addition to your closing costs. Assistance can come in the form of a grant, forgivable second mortgage, traditional second mortgage, or a matched savings program. To qualify for down payment assistance you might need to be a first-time home buyer, have an income below a certain range, complete a home-buyer education course, be a military member or public servant, or be committed to a certain level of monthly savings.
Research first-time home-buyer loans and programs
First-time home-buyer loans and programs exist in both the state and federal levels. These programs typically offer low interest rates and often, no down payment at all. Some federal loans and programs include: FHA loans, USDA loans, and Conventional loans. To find programs offered by your state, visit HUD.gov for information.
Consider arranging a co-borrower
Consider asking a friend or a relative to become a co-signer or guarantor on your loan. This allows lenders to also take their income and credit on your application but, it won’t give them ownership of the property. However, if you do not have anyone willing to agree to act as your co-signer or guarantor, you could ask a friend to team up to buy the house together.
Consult with a lender or credit repair expert for help
Do you need help improving your debt to income ratio or your credit score? Credit repair experts or lenders can help you on your path to improvement. Our team is happy to help you with our go to resources for credit repair to get you on track to buying your dream home sooner than you would be able to go if you were to go at it alone.
Download our recommendations for lenders and credit repair experts here.
The bottom line
Student loan debt can really affect your power to make large investments and when considering additional debt owed, your dream of home-ownership may seem unattainable. However, all hope is not lost. If you currently have a high debt to income ratio and a low credit score, your dream can come true by a forgiving program such as a FHA or USDA loan, restructuring of your debts to lower interest rates & payments, paying down accounts to where there are fewer than 10 payments left, considering a cash-out refinance, or getting a lower mortgage rate by paying points to get a lower interest rate and payment. Michele Harmon Team is here to help you obtain your dream of home-ownership and answer any questions you may have about purchasing your first home. If you have questions for us, please call 713-818-1330 and we will be happy to assist you.