If you have student loan debt, you are certainly not alone. In fact, as of 2022, there is an estimate 44.7million Americans with student loan debt, according to Education Data.org.
Sure, student loan debt can be an obstacle to home ownership. That can make saving for a down payment more difficult. Student loans may also increase your debt-to-income (“DTI”) ratio, which can affect your ability to qualify for a mortgage as well as the rate at which you can get it. Also, not paying off your student loan can lower your credit score, which is an important factor in determining your odds of being approved for a mortgage. Defaulting on student loans can prevent you from qualifying for some mortgage programs. On the other hand, paying off your student loan on time can be a great way to boost your credit score.
While taking out student loans can affect your mortgage in many ways, it’s not a deal breaker. It is important to remember that student loans are no different than any other type of debt you may have. Lenders do not discourage this particular debt, instead, they look at your entire financial situation. If you’re considering homeownership, you may want to look for ways to reduce your DTI. One way to do this might be by lowering your student loan payments. This can be done in several ways. The first is to apply for an income-driven repayment plan that adjusts your payments based on your current income and family size. Just be sure that this option will reduce your payments, not increase them. It may also require larger payments later in the loan. If you have private student loans, you may also want to consider refinancing your student loans which may entitle you to a lower interest rate. While your term may be extended, this could result in lower monthly payments and thus free up more money each month that could go towards paying off the mortgage. Talk to your student loan service to make sure you are comfortable with all terms of any payment plan or refinancing options before making the change.
As you begin the homeownership process, be sure to explore all of your mortgage options. There are multiple types of mortgages that allow you to buy a home with little money including VA, traditional first-time homebuyer programs, and FHA loans. Each type of program has its own unique way of calculating the estimated monthly payment for a student loan when the loan is currently on deferral. An experienced mortgage loan originator can help you find the right mortgage to fit your unique needs.
Student loan and home equity forgiveness
The Biden administration recently announced a program that would reduce or wipe out $10,000 in student loan debt for individuals making less than $125,000 annually and up to $20,000 for borrowers who received Pell Grants. This news could have a huge impact on the financial lives of millions of Americans, including the ability to buy a home.
That’s because erasing $10,000 to $20,000 in student loan debt can lower an individual’s DTI, which is the number that shows lenders how much income is associated with paying off debt. Lowering your DTI could mean the difference between being approved or denied a mortgage loan. In addition, the extra money that would have been for monthly student debt can now be used to save for a down payment and other costs associated with buying a home.
If you’re curious about what reducing or eliminating student loan debt means for your homeownership dreams, get in touch with Silverton Mortgage Loan Originator today. A member of our team will be happy to look at your unique financial circumstances and discuss all of your mortgage options.