Home Owner

Can I Buy a House When I'm Paying Off a Student Loan?

Here's a few things to consider if you are looking to buy a home while paying off student debt.

Are you really ready to buy a house?

Before you take a look at your finances to determine if you can afford this purchase, make sure this goal is in your best interest.

For example, have you considered which city or neighborhood you’d like to live in at this point in your life? College grads are likely just starting out in their career and might be better off with the flexibility that comes with renting. This way, if an employment opportunity requires a move, they’ll be free to accept it. 

Next, think about the financial ramifications of this purchase. When taking out a home loan, reflect on your budget and what it will look like after adding another monthly payment.

Consider these questions carefully before making your decision.

Getting started: Boost your credit

Once you’ve decided that you want to move forward with purchasing a home, you’ll want to start improving your credit. Your credit wellness is the primary factor that home lenders consider when deciding if you’re eligible for a mortgage. It also figures the rate they will offer you.

Here are some ways you can boost your credit score in the months leading up to your mortgage application:

  • Pay all your bills on time. Set up automatic payments to make it effortless.
  • Keep your credit utilization at less than 30 percent.
  • Pay your credit card bills in full, and before they’re due.
  • Don’t close old accounts or open new cards. You want your credit history to be lengthy, and both of these steps can significantly bring down your average.

How high is your debt-to-income?

Lots of young college graduates think it’s impossible to obtain a mortgage when carrying student loan debt. In fact, a 2018 Student Loan Hero survey found that 43% of college-educated Americans with student loans postponed buying a home because of their student debt.

Luckily, there is very little truth to this concern. As mentioned above, a student loan that is handled well should not be a deterrent to getting a mortgage. To make sure you’re managing your student debt responsibly, set up automatic monthly payments on your loan so you never miss a payment or a due date.

In addition, make an effort to pay your student loan back as quickly as possible so it doesn’t reflect badly on your debt-to-income (DTI) ratio. Since taking out a mortgage means accepting more debt, lenders are careful to check that you aren’t carrying too much other debt. Ideally, your total debt payments, including your mortgage, should account for less than 36% of your income.

If your DTI is on the high side, you may not be eligible for a mortgage just yet. Consider refinancing your student loan to a loan with lower interest rates so you can pay it off sooner and then apply for a mortgage when your DTI improves. You can also look for ways to increase your income to tilt your debt ratio in your favor.

If you’re carrying any other debt, such as credit card debt, you’ll want to pay it down as quickly as possible as well.

Determine how much house you can afford

Before you start shopping for a home, find out how much house you can actually afford. The best way to obtain this information is by applying for a preapproval from a home lender. This will tell you exactly how high you can go while showing sellers that you’re serious about buying.

If you won’t need your pre-approval just yet, but you’d like an idea of how much you’ll need to save for a down payment, you can use an online mortgage calculator to get your magic number.

Start saving for a down payment

Once you have your numbers worked out, you’ll need to save up for a down payment. Trim your budget in any way you can and look for side hustles to boost your income and make saving simple. Then, set up an automatic monthly transfer to your Listerhill Savings Account so your money can grow.

At this point, you may want to look into a local down-payment assistance program or a federal loan program, such as an FHA loan, which only requires a down payment of 3.5 percent. If you live in a rural area, you might qualify for a USDA loan, and if you’ve served in the military, you’re likely eligible for a VA loan.

If you're ready to check out buying a home, check out Listerhill's exceptional mortgage options. Our fantastic rates and hassle-free pre-approval process make a Listerhill home loan an excellent choice!

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Frequently Asked Questions

  • What does Interest-Only Mean?

    With an interest-only loan, you are only responsible for paying the interest on the amount you draw from the construction loan each month. 

    Here’s an example. 

    If you draw $15,000 in January, you pay 4.99% on $15,000

    If you draw an additional $25,000 in February, you pay 4.99% on $40,000 ($15K from January + $25K from February)

  • What is a Construction Loan?

    A home construction loan provides you with financing to build your dream home. 

    With terms up to 12 months, this short-term loan covers your costs, including land, contractor labor, building materials, and more, until your home receives an occupancy certificate.  

    Once your home is ready to move in, you will then secure a traditional home mortgage.

  • You might prefer an adjustable-rate mortgage over a fixed-rate mortgage if...

    • You plan to move before the introductory rate expires.
    • You want a lower payment during your initial payment period.
    • You think rates will drop in the future.
    • You are planning on relocating before the rate adjusts
    • You know you will be paying off the loan in a few years
    • You need to move fast and have limited time to secure a down payment
    • You do not qualify for a 30-year fixed-rate mortgage, but want a 30-year payment schedule
    • Your payment could decrease if the index against which your ARM is benchmarked drops
  • A 5/5 adjustable rate-mortgage is right for you if...

    A 30-year ARM with a fixed interest rate for the first five years, then fluctuating every five years. 

    A 5/5 ARM is best if you want to lock in a low rate over a longer period and maintain the same rate over an extended time. 

    With a 5/5 adjustable-rate mortgage, you can go 10 years with only one rate adjustment, whereas with other lenders, you could experience up to six rate changes in the same time period.

  • A 3/3 adjustable-rate mortgage is right for you if...

    A 30-year ARM with a fixed interest rate for the first three years, then fluctuating every three years

    A 3/3 ARM is best if you want to lock in the lowest rate, but over a shorter period and are okay with the rate fluctuating more often.