Since the debt you’re responsible for plays a significant role in getting approved for a mortgage loan, it’s not uncommon for student loans and other debts to leave a bad taste in the mouth of first-time home buyers. In fact, more than 75% of millennials with student loan debt who have yet to buy a house blame their student loans.
Around here, we don’t like to focus on the negative; we’re here to tell you that with the right financial moves, getting a mortgage with existing debt is within reach. But first, it’s essential to know what lenders are looking at to determine whether or not they feel comfortable financing your mortgage.
Every time lenders loan out money, they are taking risks. Lenders use things like your debt to income ratio (DTI), credit history and how stable your income is to determine how risky your loan would be to finance.
Debt-To-Income Ratio (DTI)
Lenders consider all monthly debts from student, personal, auto loans and credit card debt to calculate your DTI. Your DTI is calculated by dividing your monthly debt by your monthly pre-tax income. In general, the magic DTI number to aim for is 36% or lower. There are a few ways to lower your DTI that can give you a better chance of being approved for a mortgage.
Pay Off Debt
First and foremost, the best way to lower your DTI is to pay off your debt! Not only will you be free and clear of owing others money, but you’ll also save money by not paying all that extra interest. Win-win! There are a few proven tactics for successfully paying off debt, like the debt snowball (paying off the smallest debt first, while paying the minimum payment on other debts, working your way up to the biggest debt) and paying more than the monthly minimum payment each month.
Refinance Student Loans
Refinancing or consolidating student loans can lower your monthly student loan payment, in turn reducing your monthly DTI. Income-driven repayment plans allow you to make payments at a percentage of your monthly income.
Increase Your Income
Increasing your income can improve your DTI by showing you’re bringing in more money. This can be done through a second job, freelance work, or increasing pay at your current job. Plus, a more stable income only helps your chances of getting approved.
We get that student loans and debts can start to add up each month. Unfortunately, lenders don’t loan money out to borrowers who have a track record of not paying their bills on time. Stay on top of your debts and pay them back on time (or early) to keep your credit score where lenders want to see it (a 580 is generally the lowest accepted credit score). It’s important to note that credit scores are not solely calculated by how good you are at paying your debt. FICO scores, for instance, are comprised of five categories, broken up in the following way:
- Payment History (35%)
- Amounts Owed/Credit Utilization (30%)
- Length of Credit History (15%)
- New Credit (10%)
- Credit Mix (10%)
These other factors and their percentages indicate the level of impact they have on your credit score. When you’re trying to buy a home, try to avoid any hard inquiries on your credit like applying for credit cards, taking out a new auto or personal loan, or charging everything to your credit card. These actions can negatively impact your score, affect your DTI, and jeopardize your chances of getting a mortgage. Consider keeping your paid-off accounts open to help lower your credit utilization rate and improve your credit score.
First-Time Home Buyer Options
Today there are loan options that support you getting a mortgage with student loan debt. For instance, FHA loans hold many advantages for first-time buyers, like a higher DTI allowance (up to 50%), low credit score requirements and low down payment options. Plus, FHA loans are government-insured and give buyers more housing options from which to choose. Wyndham Capital Mortgage is well versed in the needs of first time home buyers. Need to ask a loan officer what the best option is for you? Our expert loan officers are ready to answer your questions to help you find the right mortgage for your needs.
Interested in learning more about how Wyndham Capital can help you achieve your home lending goals?