Student loan debt has made it more difficult for today’s generation to buy a home. With the average college graduate owing Uncle Sam as much as almost $29,000, it’s no wonder that many young home buyers are worried that they won’t qualify for a mortgage. However, it’s not at all impossible to buy a home in California even when you have student loan obligations. Here’s what you need to do:
Lower Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio represents the amount of your monthly income that goes toward debt payment. The ideal DTI for aspiring homeowners is at or below 36%. Of course, the lower your DTI, the better. Some of the steps to improve your DTI include paying off debts such as car loans and credit card balances, increasing your income, and not taking on more debt.
Reduce Your Student Loan Monthly Payments
Knowing how to lower the amount that goes into your monthly student loan payments can be a huge help if you’re looking to buy a house soon. Some of the ways to do so include:
- Enrolling in the extended student loan repayment plan
- Applying for an income-driven repayment plan
- Consolidating or refinancing your loans
- Securing student loan payment help from your employer
There are many ways to lower your monthly student loan payment. Talk to a student loan expert to find out more about the plans that best suit your home-buying goals.
Know How Much House You Can Afford
With your monthly payments reduced and your DTI ratio optimized, you’ll be in a better position to build your home-buying budget. Your bank or mortgage lender can help you compute how much house you can afford after accounting for the down payment, income, and other expenses. Note that the amount your lender gives you is the maximum you should pay for a home, and it’s in your best interest to look for a home that allows you to pay below the maximum.
Apply for Flexible Mortgage Programs
Low-income student loan borrowers may qualify for flexible conventional loans such as Fannie HomeReady or Freddie Mac Home Possible. Both have a high DTI limit (50% for HomeReady and 45% for Home Possible), while also requiring reduced down payments as low as 3%.
You could also consider government-insured loans provided by the Federal Housing Administration (FHA) or Veteran Affairs (VA). An FHA loan permits a higher DTI ratio of up to 57%, accompanied by a minimum down payment of 3.5% and a minimum credit score of 580.
VA loans, on the other hand, are ideal if you’re an eligible veteran, service member, or surviving spouse. With VA loans, borrowers can qualify for funding even with a DTI as high as 60% without requiring any down payment or private mortgage insurance (PMI).
Take Advantage of the Student Debt Relief Program
Hopefully, you were able to apply for the first-time home buyer student loan forgiveness program while it was still accepting applications. If you were, you could be looking to slash $10,000 off your student loan—$20,000 if you received Pell Grants. That amount can lead to a huge improvement in your DTI ratio and make your loan application more appealing to lenders. Those who failed to apply to the student debt relief program will have to wait for it to reopen.
If you are looking to buy a house in San Francisco, I have the expertise to help you find the ideal property and get your investment started the right way. Call me, top Bay Area Realtor Amir Hardy, today at 415.602.0570 or drop me a note here.