College graduates this year are the most indebted class of students yet. According to a recent article in the Wall Street Journal, the average student will graduate with just over $35,000 of student loan debt. Just ten years ago it was approximately $20,000. Additionally, starting wages have increased, but if you adjust for inflation it’s a negligible difference. Although these graduates may carry large student debts, they may still be eligible to purchase a home.
The total amount owed on student loans does not directly affect one’s ability to obtain a mortgage in every scenario. Typically, lenders will review credit scores and debt-to-income ratios. Some industry experts are even creating systems that take into consideration an individual’s student loan debt. The amount paid on a monthly basis carries a heavier weight than the total liability.
If your student loan payments are extremely high, you should consider either consolidating student loans or negotiating for a smaller monthly payment. Consolidating may get you a better interest rate and thus lower your monthly amount. Lenders may frown upon too low of a payment, so make it proportionate with the amount owed. Sometimes student loans can be pushed to deferment or forbearance immediately following graduation and stay in that state while purchasing a home. Deferment may be more advantageous than a forbearance. The main goal is to keep your monthly expenses to a minimum, and not rock the boat with your debt-to-income ratio.
As with all tradelines, it’s vital to pay all debts on time and consistently. Student loan debt can seriously affect your ability to qualify for a mortgage when you miss payments. Generally, student loan payments have a larger amount of grace days, but you still need to make the payments habitually, and on time. Missed payments or late payments can impact your credit score. Paying student loan debt consistently (or any other debts) will have the best impact on your credit score. You don’t necessarily need perfect credit, but a bad credit score will seriously hinder one’s ability to qualify for a mortgage.
The last thing that could influence a recent graduate’s loan qualifications is the amount of money saved up for down payment. A personal debate might be whether or not to save money or put money towards paying down student loan debt. If your goal is to purchase a home, it may be best to save the money towards a down payment. Although there are many loan options that offer 100 percent financing, a 3.5 percent down payment would allow for an FHA loan.
Don’t assume carrying some extra student loan debt will disqualify you from purchasing a home. If your credit score is good, your debt-to-income ratio is reasonable, and you have some money set aside for a down payment, it’s likely you can buy a home and build your equity. Remember student loans may cause a speed bump but they aren’t always a road block.