5 Tips for Buying a Home When You’ve Got Big Student Loan Debt
After months of dilly-dallying, you’ve finally decided to buy your own house. You’re already making a decent living, and it’s high time to move out of the proverbial nest. There’s one problem: Like 71 percent of college graduates in 2015, you’re saddled with student loans.
Just thinking about it makes you break out into a sweat. “If the real estate agent and mortgage lender knew how much I owed,” you think, “they’ll blacklist me for life!” Why would they do business with someone who’s barely holding up a mountain of student debt?
The good news is, they’ll still help you — as long as you meet specific criteria. Also, if you keep these not-so-common-sensical tips in mind, you can move out and achieve financial freedom.
Approach the Lender First
Whenever you deal with real estate agents and mortgage lenders, you’re in a chicken-and-egg scenario. The agent will ask you if you’ve talked with a lender, and the lender will ask you if you’ve talked with an agent. In this case, you’ll want to listen to the agent first.
Why? Because the mortgage industry is so regulated, everyone in it has the same basic requirements for potential borrowers. In other words, the next time your lender asks whether you have an agent, tell them: “No, I don’t. But I’d still like to look into the programs you offer.”
Ask for a Loan Deferment/Forbearance
If there’s no way in this lifetime you can pay off your student debt, you can still ask for a forbearance or deferment. Both of these allow you to delay or reduce your payments — with important differences.
In forbearance, you can delay or reduce monthly payments up to 12 months. But you’ll still be charged interest on your loans (including the subsidized ones). Your lender can grant you this on a discretionary or mandatory basis, depending on whether you meet the eligibility criteria.
Meanwhile, a deferment allows you to postpone payments on the principal and interest for up to three years. During the deferment period, the government will help you pay off the interest on subsidized loans, like the Federal Perkins Loan. However, you’ll still be responsible for the interest on unsubsidized debt.
Either way, make sure you read the Federal Student Aid website before you sign up. Check out the deferment option first, and if you don’t tick off any of the boxes, it’s time to consider forbearance.
Reduce Your Debt-to-Income Ratio
It might sound like typical finance gobbledygook, but it’s really simple: Just divide your monthly debt payments with your monthly income. For example, if you earn $10,000 and cough up $3,600 a month for debt, your debt-to-income ratio would be 36 percent. That’s the ideal for lenders — though some of them also accept 43 percent and higher.
Based on that ratio, there are two ways to cut it down: You can increase your debt payments, or increase your income. But don’t be too hasty when paying down debt either. Your lenders won’t want to lose extra income on that juicy interest rate.
Consider More Affordable Options
Cities like New York and San Francisco may be “cool,” but let’s face it: They’re ridiculously expensive to live in. If you don’t mind where you live as long as you free up cash, consider those places with relatively low housing prices, monthly rents and cost of living.
Alternatively, you can purchase a modular home. This type is built offsite (usually in a warehouse), and transported to wherever you want it to be. Because their manufacturers can spread the cost of materials over multiple homes, modular homes are less expensive than their traditionally-built counterparts.
Take Your Pick
Now that you’ve weighed your options regarding your debt, it’s time to choose your house. Look for a real estate agent first, and make sure they’re willing to guide you throughout the process. Come up with a ballpark range for what you’re willing to pay, and stick to it during negotiations. Don’t forget to check in with your lender, and to give the soon-to-be-yours house a quick check before you sign.
Huge Student Debt Isn’t The End
Don’t let your Everest-sized debt get you down. Even if it’ll take a long time before you pay it all off, you can still live independently and with peace of mind. Besides, student loans are considered “good” credit, so they’re not all bad.