3 Steps Toward Home Ownership - Even with Student Debt

March 24, 2020

You earned the degree and landed the job. Now you’re ready for the next big step—buying the house. Many first-time homebuyers, however, worry that they can’t afford a house due to student debt.

Sound familiar?

If you owe big bucks for school, you aren’t alone—more than 45 million borrowers owe $1.6 trillion today. “Student loans have become one of the biggest obstacles facing college students, parents and grandparents,” says Samantha Brown, Mortgage Banker at Heartland Bank.

But it’s not impossible to overcome the student debt obstacle if you’re diligent in slashing the amount you owe. These tips will help you work toward your goal of home ownership.

1. Know your repayment options.

Private student loans tend to have fewer repayment options; federal loans have many. Brown emphasizes the importance of picking a payment plan that works for your budget:

“Not all repayment options may be available to every borrower as some are income based,” she says. “Also, be sure to pay the minimum payment in full each month.” (Borrowers with delinquent federal student loans will be disqualified from a home loan approval.)

2. Clean up your credit.

Credit scores carry considerable weight in the mortgage application process. They’re based on credit history and include open accounts, debt levels, and repayment records.

A high score (640 minimum, 740+ best) means more options for the borrower. Ways to keep your score up include:

  • Make consistent, on-time payments. Limit card use and use only 30% of your overall available credit line.
  • Don’t open additional credit lines. New accounts lower your overall credit score and can affect your mortgage rate.
  • Be aware of your credit history. Access a free report from each credit bureau at www.annualcreditreport.com, and check one of the bureaus every four months to monitor yearly credit.

3. Pay down debt.

Debt-to-income ratio (DTI) is the amount of monthly debt payments divided by gross monthly income. “One of the best things borrowers can do to position themselves for a home purchase is to lower their DTI," Brown says.

Lenders prefer this number to be below 40%. If your number is higher, there are some steps you can take to lower it:

  • Use the "snowball method" to pay off the account with the lowest balance first. Once the debt is paid, pay off the next smallest debt. Continue this process until all balances are paid in full.
  • Apply tax refunds, bonuses, and gift money to outstanding balances.
  • Consider refinancing or consolidating student loans with a private lender, or enroll in an income-based repayment plan via your federal student loan servicer.

Everyone’s credit/debt circumstance is different. Working with a professional lender to evaluate your situation and recommend practical solutions is important, and with the right game plan, homeownership may not be as far away as you think.

Contact your local Heartland Bank Mortgage Banker to discuss your financial situation.

This content is for informational purposes only. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific advice from their own counsel.