We’ve all been hearing some really bad news about student loan debt. We hear of new graduates struggling with their finances because of huge amounts of college debt. They are forced to make a lot of personal sacrifices just so they have enough money to pay off this debt. They are stressed because they know they have to keep making payments because defaulting on student loans have major consequences. They can lose their money to wage garnishment. Not only that, their taxes and government benefits are in danger of being taken from them too.
This is probably why a lot of young adults burdened with this debt are choosing to delay a lot of investments like home buying. According to an article published on CNN.com, both Millennials and Gen Xers are unable to buy their first home because of student loans. Home purchases have declined by 8% among consumers between the ages of 20 and 39. According to the data provided, this is causing the housing market $83 billion worth of real estate investments.
If the student loan crisis continues, this trend might continue as well. In case that happens, it is bound to have a huge impact on the housing market. While student loans can be quite a burden, young adults should not let it keep them from making investments that will grow their personal finances.
Two things that will increase your chances to buy a home despite college debt
While it is difficult to buy a new home while you still have student loan payments to meet, it is not impossible to do so. When buying a house, you have to make sure that your finances are in order. You need to make sure that your current financial situation will allow you to be approved of a low interest mortgage loan. If you can do this, then owning a home and paying off your college debt can be managed quite easily.
But first things first, you need to increase your chances of being approved of a mortgage loan. Here are two things that you need to do.
Reduce your debt to income ratio
First tip is to lower your debt to income ratio. The rule is, the lower the percentage, the better it will be for you. That is because you have a lower debt compared to your current income. According to ConsumerFinance.gov, the ideal debt to income ratio should be 43% or lower.
To compute, you need to get the sum of all your monthly debt payments and then divide the total by your monthly income. Your incomes should be the gross amount – meaning your income before your taxes and deductions are removed. If your debt to income ratio is below 43%, it will allow you to get a Qualified Mortgage. This is a loan category that provides a lot of stable features that will make your home loan more affordable compared to other conventional loans.
If your student loans are causing your debt to income ratio to go beyond 43%, there is something that you can do to lower that. Try to switch to a repayment program that allows you make smaller payment contributions. For instance, if you are using the standard payment method – wherein you pay the same amount throughout the duration of the debt, you may want to change that to a graduated payment method. A graduated repayment method allows you to make smaller payments first and that gradually increases over time. The lower payments at the beginning of the repayment program could help you lower your debt to income ratio.
There are other repayment plans that you may want to look into that will help you lower your monthly debt payments. Do your research so you can see which of them you can use.
Improve your credit score
The second tip is to improve your credit score. According to Bankrate, the credit score is a very important number in home buying. It will help determine your interest rate for a home loan. A high credit score will benefit you every time you take loans because you can get a low interest on that loan. A good score makes you creditworthy. That means you can be trusted with a loan because you have a good record of paying back what you owe without being late or defaulting. For instance, a FICO score of 740 or higher can get you the best rates. A score of 700 will still be favorable (around 4.5%) but if you go two points down to 698, that could cost you thousands of dollars because you will be given a higher interest rate. Your interest rate will probably be 4.875% and that can cost you a lot of money throughout the duration of the loan. The lower your score, the bigger interest you will end up paying.
Now your student loans can help you improve your credit score – but only if you pay it off responsibly. The rules are quite simple. Make sure you are never late and that you always pay the required amount each month. If you do this even for just a couple of months, you will see improvements in your score.
It is very important that you choose the right financial aid to help you buy your own home. Here is a video from the Bank of America with some options for a home loan – especially when you cannot afford to get a conventional loan.
How to manage your finances to take care of both student debt and mortgage
There is a study that showed how student loans are not really the main cause of delayed homeownership among Americans. While that may be true, it is still a factor to consider.
In case you have successfully improved your finances and you were approved of a low interest mortgage loan, here are some tips that should help you manage your finances. These two loans are quite significant so you may want to make sure that it will not overwhelm you.
- Have a solid payment plan in place. This is very important. You need to prioritize paying off these two loans. Defaulted student loans have serious consequences and unpaid mortgages could lead to the foreclosure of your home. Check on this payment plan every now and then to check if it is still affordable or not. If you find yourself stretching your budget too thinly, talk to your lenders for a better payment plan.
- Spend only on what is very important. While you have huge amounts of debts, the more you need to be responsible with your spending. Choose to spend only on what is very important. If you can live without it, make the sacrifice and choose to put your money towards your debt payments or your savings.
- Hold off taking on more debts. There are other debts that you can take. Credit cards and auto loans are some of them. Do not take in more unless you have paid a huge chunk off of your student or mortgage loan.
- Have an emergency fund. You should also have an emergency fund in place. This will help you continue making payments even as unexpected expenses arise. It will also give you the security of knowing that you are financial prepared even if you have huge amounts of debt.
- Increase your income. Lastly, you may want to try and earn more money. While some mortgage loans have prepayment penalties, student loans do not have them. You can pay as much as you can early into the repayment program so you can shorten your term. That should help you decrease your interest payments and save more in the long run.