Study after study continues to reveal that millennials are citing student loan debt as a huge obstacle to home buying. Nevertheless, millennials are currently the largest home buying generation in the country, making up 35 percent of all buyers.
If fewer millennials felt that student loan debt was holding them back, that number could grow even higher, considering millennials continue to demonstrate a strong interest in owning a home. The National Association of Realtors recently reported that 85 percent of buyers under the age of 35 consider home buying a smart financial choice and 88 percent consider homeownership a crucial piece of the American dream.1
When broken down by region, NAR found similar results. While a slightly greater number of millennials in the South and West consider homeownership part of their American dream when compared to millennials in the Northeast and Southwest, at least 84 percent of millennials in all four regions see owning a home as a vital part of that dream.
NAR Research's @MeredithMDunn looks at Millennials' desire to own by region. https://t.co/XJuCocLHVh pic.twitter.com/LqRNi8f8iM
— NAR Research (@NAR_Research) April 18, 2016
Yet, so many of these dreamers feel held back by student loan debt. Fortunately, there are ways those dealing with student loan payments can buy a home.
Eliminating Student Debt From Your Debt-to-Income Ratio
When you apply for a home loan, lenders will look at something called your debt-to-income ratio, among many other things, to determine whether you will be able to afford your monthly loan payments. Your DTI is the total amount of debt you owe compared to the amount of money you make, and student loan debt can really raise that percentage.
Most lenders don't like working with borrowers who have a DTI greater than 36 percent. Depending on the type of loan you want, there could be a few ways to decrease that ratio:
- Apply for a graduated payment plan, which will cause your student loan payments to decrease for two years. After the two years are up, the payment will start to increase every two years. A graduated plan could be especially helpful for someone who knows their income will rise substantially over the next few years.
- Apply for a deferment. A deferment will cause a borrower's monthly payments to decrease for a set amount of time, and in some cases they may temporarily stop altogether.
- Consolidate all of your student loans into one. Not only will this make it so you only have to make one monthly student loan payment, but it will also increase the repayment term from 10 years (which is typical for student loans) to 30. Keep in mind however, that a consolidation loan could transfer your account to a private lender, meaning you will no longer be eligible to apply for a deferment from the government.2
Student loans don't have to stop you from living the life you imagine.
When it comes to deferment, remember that if you are in an Income Based Repayment (IBR) plan and you have provided your lender with documentation stating the actual payment it will not be factored into your DTI if you apply for an FHA loan. Conventional loans will take student loan debt into account no matter what.
Other Ways to Reduce Your DTI
If an FHA loan is not for you and your student loan debt is destined to be part of your DTI, there may still be some other measures you can take to reduce your overall percentage:
- You can focus on getting rid of some of your other debt, like your credit card totals. In addition, if you have debt that will be completely repaid in 10 months or less, some lenders may be willing to remove it from your DTI calculations, so make sure to ask about that possibility.
- Design a budget - and stick to it. Take some time to figure out how much debt you need to get rid of before you qualify for a reasonable loan. Then make yourself a plausible budget that would allow you to start lowering your DTI and saving money. Sticking to a budget isn't easy, but do the best you can.
Student loans are certainly a burden, but you don't have to let them stop you from living the life you imagine. The experts at New American Funding want to help you achieve your dreams. Contact New American Funding today and we will walk you through everything you will need to do to qualify for an affordable home loan.
If you're interested in checking out what a loan might cost you per month, New American Funding's mortgage calculator can help you determine the costs of different loans under different scenarios. Knowing approximately what you might pay per month can help you start to budget and save accordingly.
1National Association of Realtors