According to one recent survey, 41 percent of college-educated Americans with student loans have postponed buying a home because of their debt.
Having student loans won’t keep you from buying a house in Nashville, although you should be comfortable with the idea of taking on a large amount of debt while still dealing with your student loans. Carefully consider your options, and decide what makes sense for your own financial situation.
Here’s what you need to do when buying a Nashville home with student loan debt:
1. Improve your credit score and check your credit report
The most important factor lenders consider when deciding whether or not to lend you money is your credit score. You can maintain a good credit score even if you have student loan debt. In fact, your student loan debt probably won’t drag down your credit score unless you’ve been missing payments.
Here’s how to boost your score ahead of applying for a mortgage:
- Pay your bills on time.
This is the most important factor in your credit score. Pay on time and in full, and you can build a solid financial reputation.
- Manage your credit utilization.
The ratio of your credit balances to your total available credit lines is your credit utilization. For example, if you have credit lines totaling $3,000 and your credit balances total $1,000, your credit utilization is 30 percent.
Ideally, you want to manage your credit utilization so you aren’t using more than 30 percent of your available credit.
- Don’t close old accounts.
You might think that closing a credit card account is the way to go when trying to fix your credit score, but this often isn’t the case.
An old account, especially if it is in good standing, can help your credit. The longer your credit history and the older the average age of your accounts, the better your credit score.
- Use different types of credit.
If you have a “thin file,” there isn’t much for lenders to make judgments about. A mix of revolving credit (like credit cards) and installment loans (like car payments or student loans) show that you can handle different types of debt.
You may have to pay for your credit score, but some credit card companies have started offering free access to a version of your credit score so you can get an idea of where you stand.
It’s also important to check your credit report before buying a Nashville home. (Request a free annual credit report here.) Make sure your report is accurate and up-to-date.
2. Decrease your debt-to-income (DTI) ratio
As with student loan refinancing, a mortgage lender will calculate your debt-to-income ratio to determine your ability to make monthly payments on the new mortgage.
When buying a house with student loan debt, you need to be aware of the impact your loans have. Many lenders follow what is called the 28/36 qualifying ratio to determine if you’re eligible for the best rates.
This means that you should spend no more than 28 percent of your gross monthly income on total housing expenses, and no more than 36 percent on total debt service (including the new mortgage payment).
You can still buy a home if you don’t meet the 28/36 rule, as many lenders will still loan you money if your DTI is high. But you have to decide if you’re really comfortable taking on a loan when you have a high DTI.
Reduce your DTI by paying down some of your debt or by increasing your income. Take a second job, get a side gig, or ask for a raise. Depending on your student loan situation, you might be able to refinance or consolidate your student loans to obtain a lower monthly payment.
Alternatively, you could enroll federal student loans into an income-based repayment program which can lower your monthly student loan payments. This improves your cash flow and can make your home a little more affordable on a monthly basis.
While refinancing or finding a new repayment plan may improve your DTI, it really depends on the type of mortgage you’re applying for.
Some mortgage underwriters base decisions on the percentage of your total student loan balance rather than using your monthly payment amounts under an income-driven repayment plan. If that’s the case, you might need to shop around for a lender if you want to ensure that you are approved for a loan.
Continue reading: Student Loan Hero