How to Buy a Home Even with Student Loan (and/or other) Debt.

My Dirty Little Secrets for Buying a Home

Buying a home for the first time can be confusing. That’s why the tips and strategies you’ll find in my 8-week series will set you on the right path. It’s my own unique approach and a “behind the scenes” glimpse of what you should look out for and consider when starting your own search for a home.

Is student loan debt (or credit card bills, car loan, medical bills … check the boxes) holding you back from being a homeowner? 

You’re not alone.

Many first-time buyers are worried that their large student debt and possibly other outstanding debt balances take them out of the game when buying a home. But, most of the time, it doesn’t!  

So, don’t automatically assume you’re facing a roadblock to homeownership if you have student loan debt and other outstanding balances, the reality is, most everyone does, even people who have bought a home. 

The good new is that there are ways to work with lenders and assistance programs to make your home purchase a reality — whether is it your first home or your forever home! 

Now, I understand that you may be grappling about whether you should pay off your student loan debt first (or/and other) debts before you even purchase a home. Ok yes, that could be an option but don’t make it your only one. 

There are some other options for you to consider so you don’t have to delay years until becoming a homeowner!

And always remember to please consult with your own financial advisor to determine what is best for your situation.

How Lenders Look at Student Debt

Let’s get to the basics first. When you buy a home, a lender will look at your debt-to-income ratio or DTI. 

It’s the amount of recurring debt you have monthly compared to your gross monthly income.  In a lender’s eyes, your DIT is more important than your credit score or how much money you have for a down payment.

Why?

A lender needs to consider your recurring debt — such as a car loan, credit card payments AND your student loan(s) — in order to determine if you can afford more debt with a monthly mortgage payment.  

However, most lenders like to stick to the 28/36 rule. And that’s where the 36% DTI from above comes into play. 

• The 36% is the back-end ratio and equals your entire monthly housing costs expenses (principal, interest, mortgage insurance, property taxes) plus other debts (student loan, car loan, credit cards, etc) divided by your gross monthly income. It’s the DTI we explained above, and you don’t want to go above 36%.
• The 28% is part of the front-end ratio equals your monthly housing expenses (principal, interest, mortgage insurance, property taxes) divided by your gross monthly income. Your other recurring debt is not included. Again, a lender doesn’t want to see it above 28%.

Keep in mind, your DIT and the 28/36 rule has nothing to do with your credit score or how well you pay back your debt. It’s looking at the amount of debt obligation you currently have when compared to your income. Not whether you’ve been good at paying your student loan and other debt each month. (But keep doing that too!)

And that’s why it can be frustrating for many first-time buyers with student loan debt who have good credit scores. 

How to Lower Your DTI

If you need to lower your monthly debt and obligations, start with your student loan lender(s). Here are some options to consider. Remember to always consult with your own financial advisor before pursuing.

• Graduated repayment plan – payments start low and rise every two years as your income should rise.
• Loan consolidation – if you have more than one student loan, combine them into one with a lower interest rate.
• Lengthen your payback term – spread out your loan repayment over more years to lower your monthly obligation. This will increase you long-term interest payments so carefully way the pros and cons of this strategy.

Examine all of your financial obligations and find other ways to lower you DTI: 

• Consider bumping up your monthly income…Is it time to ask for that promotion or pay raise?
• Do you have a lease or a car loan? See if you can renegotiate a lower interest rate therefore a lower monthly payment.
• Credit cards often are our most expensive debt, see if you can negotiate a lower minimum monthly repayment requirement on your credit cards, especially one that is on the higher side. Some credit card companies are willing to work with you if you have a good credit score and payment history.
• In all, see if you can create a budget and put together an overall financial plan in order to reduce existing debt. Prioritize high-interest debts, and explore debt consolidation options. Every dollar count and balancing your budget and lowering your monthly bills could help your cash flow and savings.

Shop Around for Lender

When you have student loan debt, you need to find a mortgage lender who is willing to work with you and offer programs that may be geared toward borrowers just like you.

Keep Increased Loan Limits In Mind

Note that 2024 has new and increased loan limits. The FHA (for single family home) raised the conforming loan limits to a maximum – allows for up to $498,257 and conforming loan allows for up to $766,550. Now it can be easier for many buyers to qualify for conforming loans backed by Freddie Mac and Fannie Mae. There is always jumbo loan (for when you have to borrow more than the conforming limit), but typically those require a larger down payment, and sometimes higher interest rate. This is great news for those of you waiting on the sideline, contemplating with debt and constrained cash flow. 

California Dream for All Program

The Dream For All Shared Appreciation Loan is a down payment assistance program for first-time homebuyers to be used in conjunction with the Dream For All Conventional first mortgage for down payment and/or closing costs.

The conventional first mortgage lets you borrow 80% of the home’s value, while the down payment assistance program lends you the remaining 20% at the time of purchase. When you sell the home, you pay back the original 20% borrowed, plus 20% of the appreciation in the value of the home.

Tapping into Federal Loan Programs

There are several government programs that offer loans to borrowers with student loans. Each has different requirements and may not be a good option for you. However, one may make your homeownership dreams comes true.

• Fannie Mae HomeReady Mortgage  — allows up to a 50% DTI and 3% down payment.
• VA Loan Guaranty – Buyers who have served in the military can qualify for a loan with 41% DTI. That can be overridden if some of your income tax free.
• FHA Loan – Usually allows a 43% DTI but will sometime allow a higher DTI on case-by-case basis.

Getting Assistance in California: For more information visit the California Housing Finance Agency – (for First Mortgage Programs AND Down Payment Assistance Programs)

Are You Ready?

Evaluate if you’re truly ready to be a homeowner even though you have student loans to pay back. Homeownership is both a big financial and lifestyle commitment.

Honestly answer questions about yourself. Do you have a good job with steady income with expectations of more earning power? Do you plan to remain in the area for the next 5 years minimum? Have you been paying back your debts obligations each month and have some money saved? Is your DTI not too high and you’re willing to find an assistance program that could help?

Questions and Planning Ahead 

I am here to help you determine if homeownership is right for you now or in the near future. It does take some planning even if you don’t have any loans, so give me a call, and let’s schedule some time for us to come up with a plan based on your timeframe.

Don’t let student loan or other debts slow your home buying dreams.  

P.S: I’ve had clients end up paying off their debts in FULL with the equity they received from their first home purchase. Buying a home could possibly help you pay off your student loans or any other debts even more quickly!  No guarantees, but I’ve known many people to have that experience!

Up next week is my final article in My Dirty Little Secrets to Buying a Home series. You’ll find out why Buying a Home Is Like Falling In Love! It’s a topic you don’t want to miss.