Home Buying & Student Loan Debt

Home loanBy now you have probably heard that the student loan debt industry is beginning to take a toll on the mortgage lending industry.  For 20 and 30-somethings, their chances at owning a home are dwindling with each passing college semester they borrowed to fund. However, that doesn’t mean all hope is lost, just that qualifying for a home loan while repaying your student loan debt balance takes a solid plan of action.

The Challenges

One of the most obvious challenges is the credit report. High debt balances and multiple other debt accounts can all quickly chip away at a credit score. Take into consideration that many young adults don’t have much of a credit history to show other than big student loan debts and it becomes difficult to justify lending to someone who looks risky on paper. With upwards of $20,000 or more in student loan debt, many lenders simply cannot make the debt-to-income ratio work for approval.

Another challenge is not understanding how much of a home loan you qualify for. The basic underwriting guidelines for an FHA loan require that your debt load not exceed 50% of your monthly income. For example, assume you have mild credit card debt with a monthly payment of $150 and a student loan debt payment of $350 per month, your total monthly debt would be $500. The  monthly payment for a $200,000 home with a 5% down payment would be around $1500, depending on interest rate, taxes, and mortgage insurance. If you take the mortgage payment of $1500 plus the debt balance of $500 it equals $2000, which means your monthly income must be twice that at $4000.

It would take a salary a bit over $50,000 a year to cover that. So you can see that even a good salary can get squeezed out by a high debt-to-income ratio. The trick here is to pay off more of your loan before buying a home, or to shop homes in a more affordable price range.