Qualifying for a mortgage with student loan debt is a common obstacle among the American Millennial population. Millions of American Millennials (born between the early 1980’s and early 2000’s) are faced with high amounts of student loan debt but are eager to purchase their first home and move on to the next stage of their lives.
According to a study by The Institute for College Access & Success, the average amount of student loan debt in the United States is $28,950, and some states have an average of over $33,000. There is no doubt that student loan debt can have a negative impact on these young adults looking to purchase a home in the next few years. However, the situation may not be as dire as it seems.
There are two main ways borrowers can lessen the impact of student loan debt on their finances:
1. Fix or improve Credit/FICO score
Making a late payment, or missing one altogether can negatively affect a borrower’s credit score, limiting their ability to qualify for lower interest rates and loan programs. On the other hand, on-time student loan payments can help positively increase a borrower’s credit score and help build their credit, increasing their ability to qualify for more affordable loans. Keep in mind these steps to improving credit.
2. Decrease Debt to Income (DTI) ratio
When qualifying borrowers for a loan, Lenders do not focus on the total debt burden but instead look at a borrower’s Debt to Income Ratio (DTI ratio). The DTI ratio is a percentage which compares the sum of all of the monthly payments a borrower makes, divided by their total gross monthly income. The lower the ratio, the easier it will be to qualify for a loan. If your borrowers’ DTI is higher than 36%, they may want to consider taking steps to reduce it.
- Increase monthly payments- extra payments can help lower overall debt quicker
- Avoid taking on more debt- reduce the amount charged to credit cards and avoid new loans
- Postpone large purchases until you have more savings
- Recalculate DTI monthly to keep track of your progress
Important: Get Pre-Approved
Meeting with a mortgage banker get pre-approved will help the borrower understand potential that issues might occur when purchasing a home. This will also help them to recognize their goals and know what to shoot for when saving money and reducing their DTI ratio.
Don’t let your first-time buyers perceive student loan debt as a major obstacle to qualify for a mortgage. Have them meet with a Loan Officer from “The Polder Group” early in the process to alleviate concerns, and obtain an accurate picture of their ability to qualify.