How to Get a Mortgage If You Have Student Loans

Episode 052

Home ownership is The American Dream, at least to some people. The good news is that with proper planning and a goal-oriented mindset, you can qualify for a mortgage even if you’ve got what feels like a crushing amount of student loan debt on your shoulders.

In fact, a 2015 study done by TransUnion found that in only three to six years, student loan consumers in their 20s are able to pass similarly aged consumers without a student loan in overall loan participation rates on mortgages, auto loans, and credit cards.

The road to a mortgage is a pretty straight one that requires you to take only 5 steps. They are:

  1. Minimize your federal student loan payments
  2. Make your student loan payments on a timely basis
  3. Maximize your ability to save money for a downpayment
  4. Look for ways to bring down the balance of your private student loans
  5. Maximize your income

On today’s episode we look at each of the 5 steps more closely to help you devise your strategy for getting a mortgage.

Minimize Your Federal Student Loan Payments

It used to be the case that if you deferred your student loans, they wouldn’t count when it came time to apply for a mortgage. Not so anymore.

Under new FHA guidelines that went into effect in September 2015, applicants who had been granted a temporary deferment from making monthly student loan payments for at least 12 months are required to include that debt ignored in their debt-to-income ratios.

Debt-to-income is used by lenders to determine whether you’ve got the ability to pay your mortgage. If your debt-to-income ratio is too high (typically 43 percent), the lender will see you as more likely to default on the mortgage.

FHA rules require that 2 percent of your outstanding student loan balance be counted toward your debt-to-income ratio if your loan is in deferment. But if you’re in repayment then the FHA looks at your actual loan payment in figuring debt-to-income ratios.

The solution, then, is simple. For your federal student loans, you should opt into one of the income-dependent repayments immediately. This will keep you out of deferment and minimize your student loan payments.

Make Your Payments On a Timely Basis

As I’ve said in the past, a credit score is a number that reflects your historical repayment patterns and infers your present ability to make payments. It’s calculated based on five categories, including:

  • The amount you owe on your outstanding debt
  • Your payment history
  • The percent of your credit that is new, as opposed to longstanding
  • Length of your credit history
  • Mix of different types of credit

When you make your student loan payments on time, you show your ability to pay and build a positive payment history. You also lower your debt-to-income ratio to the extent that you’re reducing your balance.

The longer you keep it up, the better your credit score.

Maximize Your Ability to Save Money

Making your student loan payments on time is bound to reduce the amount you’ve got left over to save for a downpayment. But without that down payment, your chances of getting a mortgage are slim at best.

In order to build your down payment, you need to start with a determination of how much money you can afford to spend on a house based on your income and bills.

If you need help figuring out what you can afford, try a home calculator like the one from Bankrate.

From there, you can begin to save money. In fact, you want to shoot for more than 20% of the purchase price because it will make it easier to get approved for a mortgage. A 20% down payment also helps you  avoid Private Mortgage Insurance, the additional charge you’ll pay for your mortgage company’s insurance policy that gets added if you owe more than 80% of the value of your home.

If you live in a place where 20% is going to be more than you can reasonably save in the next 5 years due to property values, don’t worry too much. Fannie Mae and Freddie Mac will now buy mortgages with as little as 3% down, which means some mortgage loans are now easier to get with a lower down payment.

Now that you’ve got that number in hand, you can start saving. To do that, you need a budget and a savings plan.
Use a spreadsheet to deduct your monthly expenses from your monthly income, and then start cutting out unnecessary expenses ruthlessly.

Any money left over in your budget should be saved, ideally automatically so you’ve got less of an ability to cheat yourself. Have your payroll company deduct a fixed amount from each paycheck and have it direct deposited to a saving account.

You can supplement your savings by using a service like Digit, which automatically moves money from your checking account to a separate savings account based on your income and spending patterns.

If you’ve got an IRA you should know about an IRS tax benefit for first-time home purchases through your IRA account. Though you’ll have to pay income taxes on the withdrawal, you won’t have to pay an early distribution penalty if you need to take up to $10,000 for a first-time home purchase or for building a home.

If you’re dealing with a Roth IRA, the investment account has to be at least five years old before it can be tapped for this qualified distribution.

Taking a withdrawal from your IRA should always be your last option because it’s like stealing from your future in order to pay for your present. Still, it’s something to consider.

Reduce Your Private Student Loan Balance

The biggest roadblock to your ability to get a mortgage is your private student loan. These loans don’t offer any income-dependent repayment options, and often come with variable interest rates and guarantors.without IDR, usually with variable interest rates, and often with guarantors and cosigners.

You want to bring them down as fast as you can.Refinance with a company like SoFi, Common Bond, or others. Get a better rate so you can pay it off faster.

If you can, consider refinancing with a company like SoFi, Common Bond, or other banks that offer private student loan refinancing. Get a better rate so you can pay off the private student loan more quickly.

For many people, refinancing isn’t an option. If you’re in that position, consider selling belongings that aren’t absolutely necessary. It’s going to hurt, but the pain is lessened by keeping your eye on your long-term goal of getting a mortgage.

Maximize Your Income

There are only two ways to get out of debt and save money – spend less or make more.

Ideally, you’re going to do both as you look to achieve your goal of getting a mortgage.

Consider taking on a second job. Sacrifice your leisure time for the money that comes with working more.

With so many options for making more money – from Task Rabbit to Uber and Lyft to short-term gigs on Craigslist – there’s no shortage of opportunities. It may not be glamorous work, but it’s an honest and ethic way to bring in more cash.

Even if You Don’t Want a Mortgage

Maybe you don’t want to buy a home now. You may never want to take on the responsibilities of home ownership, in fact. But when you work towards a lower student loan debt and a fatter savings account, you have the freedom of choice that isn’t otherwise available to you.

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By |2016-11-07T21:05:56+00:00April 12th, 2016|