How to Buy A House with Student Loan Debt

While student loan debt is a burden on you and your wallet, it doesn’t have to prevent you from buying a house. Forbes estimated there are 45 million borrowers for student loans that add up to 1.6 trillion dollars! So, be reassured that you are not alone. 

As long as the monthly payments fall within your budget and you’re okay taking on more debt, you can buy a house with student loan debt. There are even assistance programs through the Texas State Affordable Housing Corporation to help you! 

Here’s how to buy a house when you have student loan debt:

1. Review your credit score.

Credit scores impact if you’ll qualify for a mortgage loan and if your interest rate will be low or high. The best home loan rates go to buyers with a score of 700 or above. Sometimes it ranges depending on the mortgage company, so you may still qualify for a mortgage with a lower score. 

If you need help improving your credit score, here’s how.

• Pay your bill on time every time. 

Payment history makes up a lot of your credit score, so it’s important to pay before or on the due date. A lot of credit cards and apps have an option to set up reminders or automatic payments. 

• Lower your credit utilization ratio.

The ratio measures how much of your total available credit you’re using. Typically, less is better for your credit score. To lower the ratio and increase your score, pay down some of your loans, and keep your credit card balance under 30%.

• Keep current credit cards open.

This will help prove a long credit history, and you have managed debt before.

• Avoid opening new credit accounts. 

Any homeowner looking to buy should not open new credit card accounts or loans. Both of these require a hard credit inquiry. A hard inquiry is when a creditor or lender looks into your credit because you are asking to increase your debt burden. A hard credit inquiry negatively affects your credit score since more debt can affect your ability to make payments on the debt you already have. 

• Check your credit reports often.

Usually, your bank or credit card company will offer a credit report. Take advantage of the free report and check it for errors or fraud. If there are mistakes that aren’t fixed, it will hurt your credit score. 

The higher the credit score, the lower the interest rate, which means the lower the total interest paid. Higher credit scores equal less money in the long run. 

2. Lower your Debt-To-Income (DTI).

DTI stands for debt-to-income ratio. To calculate this, add up your total debt payments and divide by your monthly gross income. This ratio can affect your mortgage payments. Lenders look at two types of DTI ratios: the front-end DTI, which only includes your housing costs, and the back-ratio DTI that consists of all debts. The requirements will vary with each lender and mortgage program. Still, an excellent back end ratio to get a reasonable mortgage rate should be under 43%.

If your DTI is higher than 43%, you can decrease it by:

• Paying your credit card balances.
• Pay off other outstanding debt like a car loan or a student loan. 
• Increase your income.
• Look at cheaper houses to lower your housing budget.
• Refinance your student loan, which will lower your monthly payment. 
• Enroll in an income-based repayment plan

3. Get down payment assistance. 

The down payment is what you must pay upfront when you buy a home. This is calculated as a percentage of the home’s value. This percentage can range from 3 to 20%, depending on the lender and the program. The National Association of REALTORS® said that first-time homebuyers made an average down payment of 6% in 2019. Remember that if you put down less than 20%, you’ll have to pay private mortgage insurance to your lender, which increases your monthly payments. 

Here are some federal loan programs to help lower the down payment requirement, even when you have student loans: 

• Federal Housing Administration loans require 3.5% if your credit score is at least 580.
• Service members, veterans, and surviving spouses may qualify for help through the Department of Veterans Affairs.
• If you’re in a rural area, you could qualify for a loan from the U.S. Department of Agriculture who requires no down payment. 
• On most conventional loans, you can put down as little as 3%. (Don’t forget about PMI!)

The Texas State Affordable Housing Corporation offers multiple programs for Texas home buyers. The Down Payment Assistance is available for up to 5% of the loan amount. They have two options: a grant (which never needs to be repaid) or a forgivable second lien loan. 

The forgivable second lien down payment assistance has 0% interest and no monthly payments due. Forgiveness is entirely given during the three-year term upon sale, transfer, or refinance. A credit score of 620 or above is required. This program’s pros are no additional fees, lower interest rates, and you do not have to be a first time home buyer to qualify.

4. Utilize homebuyer programs. 

The Texas State Affordable Housing Corporation also offers homebuyer programs like Home Sweet Texas Home Loan Program, Homes for Texas Heroes Program, and Mortgage Credit certificate for first-time buyers. 

The Home Sweet Texas Home Loan Program is available for Texas home buyers with low and moderate incomes. The Home for Texas Heroes Program provides home buying assistance specifically to teachers, police officers, firefighters and EMS personnel, corrections officers, and veterans. The Mortgage Credit Certificate is specifically for first-time buyers. The MCC is a mortgage interest tax credit to reduce the federal income taxes you pay every year. 

Always check the programs’ eligibility since you may need to meet specific requirements like income, being a first-time buyer, or living in a home for a certain number of years. 

5. Get pre-approved. 

A mortgage pre-approval is the next step! This letter from a lender explains how much you can borrow and your estimated monthly payment. This will help you stay within your budget and show sellers you’re serious when you make an offer. 

Buying a home is a significant next life step for some, and with most Americans having student debt, it doesn’t need to be put off any longer. Following these five steps, you can prepare for a loan and fit the monthly payment in your budget. If you’re ready to take that next step or need advice, call me at (512) 563-5550 or email me at adrienne@hughes-and-company.com.

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