So, you think you might be ready to buy your first house. You’ve graduated, you’re working, it’s time to stop throwing money away on rent and take the next step into adulthood: property ownership. Congratulations!
But, wait, how do you go about buying a house with that enormous student loan?
Let’s take a look.
Can I buy a house even with student loan debt?
The short answer here is yes. If your income is high enough to cover both loan payments (and incidentals, like food), you should be able to buy a house even when your student loan is still outstanding.
If your student loan payment is too high, consider refinancing your student loans to lower your monthly payment and overall interest paid on the loan.
The most important factor for lenders is your debt-to-income (DTI) ratio. If it’s less than 43%, you’re good to go. According to the U.S. Bureau of Consumer Financial Protection, “this number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.”
To figure out your DTI, divide your gross monthly income by your total monthly debt payments. For example, if your gross monthly income is $5,500, and you pay a total of $2,000 a month for debt repayment ($1400 a month for your mortgage plus another $600 for the total of your student loan and credit card), your DTI is 36%. This is considered a healthy debt load.
Still, one in nine new home loan applications are denied, and it can be due to something as simple as getting a new credit card just before you submit your loan application. That’s because the new credit card increases the amount of your potential debt, which may push your debt to income ratio into the danger zone.
The accepted rule of thumb is that no more than one quarter of your income should go to housing. That means that the remainder (75%) of your income has to cover everything else.
How much should I put as a down payment?
Your best approach is to put down as much of a down payment as you can afford. The figure you’ll likely hear for typical down payments is 20%, but remember, that is from the lender. Of course the lender wants a big down payment: It lowers their risk.
But there are two main advantages for you too. With a down payment that’s more than 20% of the purchase price:
- Your lender won’t require mortgage insurance.
- The total amount of your loan will decrease, as will your monthly payments.
Still, a large down payment has got to fit your budget. This can play out in two ways:
- If you’ve got the savings but a low income, a large down payment is smart.
- If you’ve got savings and a high income, a large down payment can actually buy you more house without increasing your monthly mortgage payments.
Can I buy a house with bad credit?
You can buy a house with bad credit or no credit at all, but you won’t qualify for a conventional loan.
That’s because lenders look for three things when issuing conventional mortgages:
- A steady income.
- A debt-to-income ratio of less than 43%.
- A 600+ credit score.
If you don’t have an established credit history, you may qualify for a Federal Housing Administration loan. The FHA is part of the U.S. Department of Housing and Urban Development (HUD). It’s HUD that insures your loan. And a government-insured loan means lenders can offer you terms they might not be able to otherwise, one being credit requirements that are easier to qualify for than those for conventional loans.
Local home buying programs can help
It’s worth noting, though, that you might have to make up for that easier credit requirement with a higher down payment. If that’s the case, you might also look into local home buying programs. Sponsored by your state or local government, these programs offer various resources and assistance programs to help you buy your home.
First-time homebuyers in California who need assistance with the down payment, for example, can contact the California Housing Finance Agency. If you’re eligible for the MyHome Assistance Program, you can receive a deferred-payment junior loan of a maximum of $10,000.
Another approach is to find a lender who does manual underwriting, advises Dave Ramsey, author of “The Total Money Makeover.” They’ll take a personal look at your finances to see that you’re financially responsible. This includes proof of income, a history of rental payments, utility bills, phone bills, and insurance payments as well as daycare and/or tuition payments. Ramsey adds that “unscorables” will need a big down payment too, and should aim for 20% or more.
The Department of Agriculture also has a homebuyers assistance program. The Guaranteed Loan Program means qualified rural homebuyers don’t have to put any money down. The goal of the program is to help low and moderate-income households in rural areas make homeownership a reality.
Should I buy a house vs renting?
It depends, and much of it depends on where you live. In nearly half of the country, you’ll save money by renting rather than buying a house. Basically, if rentals in your region cost nearly double the cost of owning, buying a house makes sense. Still, there are costs to ownership, including property taxes and maintenance.
Your career may be a factor too. If you expect to be moving every couple of years, a rental property gives you more freedom than a home you have to sell.
The high ticket price of houses and high down payments (especially for first-time buyers with no credit history) can also sometimes make renting the better option. Especially in times when the economy is weak, unemployment is high and job insecurity is a factor nationwide.
The real benefit of homeownership is that you can build wealth through home equity. According to the U.S. Census Bureau, “homeowners' median net worth is 80 times larger than renters' median net worth.”
How do I find a lender for my mortgage?
Read this HUD booklet called Shop, Compare, Negotiate before you do anything else.
They compare shopping for a mortgage like shopping for a car – it’s a product and comparing all the costs involved can save you thousands of dollars. They explain fixed and adjustable rates, points, fees, and private mortgage insurance, and have a great worksheet that’ll help you ask the right questions and stay organized.
Remember to ask friends, family members, and your real estate agent for their recommendations. When you’re shopping around, don’t exclude anyone. Try your bank, a local credit union and look into online lenders as well.
Use that HUD worksheet to ask each of them about:
- credit history requirements
- interest rates
- loan terms
- down payment requirements
- property insurance
Some questions are pretty detailed. Don’t be afraid to really get into the weeds. For example:
- How long does the process take? This is a good question to ask for the pre-approval process as well as for an appraisal and the closing itself.
- Have the lender spell out any and all the fees you will have to pay. These can include:
- Real estate commission (the buyer’s agent typically receives up to 3% of the home’s sale price)
- Loan origination (which can be 1% of the total loan amount)
- Mortgage points (also called discount points)
- real estate appraisal
- Credit report (some lenders cover this $30-$50 fee themselves)
- Loan application fee (varies widely, from $0 to $500)
- Will the lender waive/reduce any of these fees? (Be careful: Lenders may lower fees but increase the interest rate on your loan).
- Do you have to pay the fees upfront or will your lender roll them into your mortgage?
Once you’ve got all the details, you can not just compare them to see what works for you. You can also use the details to ask for better terms. For example, if your bank and a credit union are pretty identical in their rates and requirements, ask your bank to lower its interest rate. To keep your business, they might be willing to negotiate.
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