If you went to college in the United States, chances are you have student loans. In fact, one in five American adults, or 44.7 million people, has student loan debt. And while most Americans with student loan debt are young, many are older—the number of people over 60 carrying student loan debt has doubled in the past decade. Some will be paying off student loan debt for their entire lives.
So, what does a seasoned or first-time home buyer with student loan debt do? Although student loans and buying a house seem like two things that are in entirely different leagues on their own, they can coexist. Buying a house with student loan debt is still certainly doable. Even large student loan debts don’t have to preclude homeownership, as long as you’re comfortable carrying two long-term debts at the same time.
You need to plan carefully for a home purchase, and we’re going to help. Let’s take a look at some first-time home buyer tips as they relate to buying a house with student loans.
Can I Buy a House With Student Loans?
Unfortunately, using student loans to buy a house isn’t an option. Federal student loans can only be used to pay for things while you’re a student, such as living expenses, tuition, food, school supplies, and more. You won’t be able to use these funds for a down payment on a home.
Do Student Loans Affect Buying a House?
The short answer is yes, only because paying student loans may make preparing for a down payment, as well as the costs of homeownership a longer process.
When homeowners have buyer’s remorse about a home purchase, it’s usually because they didn’t prepare themselves adequately for the realities of homeownership before making an offer. The costs of homeownership don’t end with your down payment and mortgage payment. They also include homeowners insurance, property taxes, and maybe even homeowners association (HOA) fees—not to mention maintenance and upkeep of the house and the surrounding property itself.
If you have a small down payment (usually less than 20 percent), you’ll have to pay for private mortgage insurance (PMI), which is an additional fee tacked on to your monthly mortgage payment. Whether you’re getting a home loan with student loans or not, when seeking out mortgage approval, you should get pre-approved for a loan before you even start looking at houses so that you can get an idea of how much you can afford and what your average closing costs will be.
By preparing for all the costs involved in buying and owning a home, buying a house with student loans and properly maintaining it doesn’t have to be overwhelming. You can choose a home in an area with low property taxes or without an HOA. You can learn about the things that tend to drive up homeowners insurance, like wood-burning furnaces or pools, so you can avoid homes with those features. When you’re ready to buy a home, educate yourself on current real estate trends in your market, what to look for when buying a house, and even when the best time to buy a home might be, so you can find the best property at the best price. Keep in mind that you can also buy a home warranty to offset the out-of-pocket costs of home maintenance and repairs.
How Can I Improve my Credit Score to Buy a House?
Improve your credit score by paying your bills on time, keeping your credit utilization ratio below 30 percent, and keeping your old credit accounts open.
Paying your bills in full and on time shows lenders that you can be trusted to make your payments. To help with your credit utilization ratio, keep old credit accounts open. Plus, the older the age of your open credit accounts and the longer your credit history, the higher your credit score.
Buying a house with student loan debt isn’t all about the down payment and other costs. Your credit score is crucial. The better your score, the more likely you’ll get a home loan with a good interest rate. You should aim for a score above 680. However, credit scores above 740 get the best rates.
Especially as a first-time home buyer with student loan debt, you should also try to use different types of credit. While using credit cards wisely can improve your credit score, showing a mix of installment loans and revolving credit accounts on your history shows your ability to juggle different types of credit.
Are Student Loans Considered in Debt-To-Income Ratio When Buying a House?
Lenders will look at your debt-to-income (DTI) ratio, which shows what percentage of your monthly income goes to debt repayment, when deciding whether to give you a mortgage. Ideally, your monthly debt payments should be lower than 36 percent of your total income, and your total housing expenses should be less than 28 percent of your income. However, some lenders and loan programs are more flexible when it comes to DTI. Keep this in mind, especially if you are buying a house with student loans in deferment. Even though you technically might not be paying anything on your deferred loans, those amounts will still be factored into your DTI ratio.
To improve your DTI, you can consolidate your student loans to get a lower monthly payment. If you have credit card debt, take steps to pay it off or consolidate it with a lower-interest personal loan. If you have federal student loans, try applying for an income-based repayment plan to lower your monthly payments. You can also try improving your DTI by raising your income, whether that means asking for a raise or taking on a second job or side gig.
How Do I Find Down Payment Assistance to Buy a House With High Student Loan Debt?
You can find down payment assistance through the Federal Housing Administration, USDA loans, and VA loans.
The biggest challenge most prospective home buyers face, especially those buying a house with student loans, is saving for the down payment. While you can use money gifted from a relative toward your down payment, your lender will require a gift letter to verify that the money is, in fact, a gift rather than a loan, and that the giver is someone you’re closely related to. Lenders will examine your financial history closely and will require an explanation of any large, out-of-payroll amounts counting toward your down payment.
Traditionally, you’d need a down payment of 20 percent, but that’s no longer the case. A popular option for first-time home buyers with student loan debt includes Federal Housing Administration loans because they only require a down payment of 3.5 percent, although you’ll have to carry PMI because it’s a smaller down payment. If you want to buy in a rural area, you can get a USDA loan with no down payment. Veterans and active military members may also qualify for down payment assistance, and some states offer down payment assistance to low-income residents or single parents. With down payment assistance from a government program, you don’t need a substantial savings account or help from relatives to swing a down payment for a house.
Don’t let student loans keep you from realizing your dreams. Buying a house with student loan debt is very much possible, as long as you’re willing to put in the hard financial work. With careful budgeting, lots of patience, and understanding the financial assistance that might be available, affording a home while carrying student loans can be within reach.
Once you’ve got the keys in hand, protect your home and budget with a home warranty from American Home Shield. Let us help you find the right home service plan for your dream home’s systems and appliances.