From student loans to credit cards, credit instruments make life easier for everyone. They help you manage present-day problems through your future income. While they may help you get through necessary life limitations, you should only take out a loan that you are comfortable to pay back.
https://cdn.pixabay.com/photo/2017/05/18/11/04/key-2323278_1280.jpg
Sadly, there is more than $850 billion in outstanding student loan debt among borrowers age 40 and lower. If you fall into this category, it might be quite tricky to determine whether you should actually buy a new home while still paying down your student loan. Although managing to pay down both a mortgage and a student loan isn’t impossible, a lot of factors should be considered when making this decision.
Here is a guide to help make the decision easier:
Why Student Loans and Mortgages Might Not Co-Exist
Student loans might make it tough to attain the ideal credit score for getting a mortgage at a great rate, especially if you miss payments for the student loan. However, making payments on time will improve your score. On the other hand, having a great student loan debt increases your debt to income ratio.
While it might be easy to get a mortgage, the resulting debt to income ratio might be too high to get accepted for other loans in the future. Also, the fact that a good chunk of your income is going into paying down the student loan debt means that it might be tough to save up for a favorable down payment to get a mortgage at a fair rate. Lastly, trying to cater for the two loans simultaneously might mean having to forego certain financial aspects like saving up for retirement.
Start With Improving Your Credit Score
A great credit score will not only help you get loans at favorable interest rates, but it can also be a vital factor when it comes to applying for jobs and apartments in the future. Typically, lenders will look into your credit score to determine whether you are financially responsible enough to pay down the loan. As a result, you should work to improve it before even deciding to start saving for your home. You should:
- Make timely payments to your bills
- Manage your credit utilization ratio to less than 30%
- Improve your credit mix
- Keep old credit card accounts open to take advantage of your credit history
- Correct any mistakes on your credit report
Get Pre-Approved For a Mortgage
A mortgage pre-approval helps to determine the requirements that you need to meet to apply for a mortgage under your current situation. It can be wiser to get preapproved than to try applying with different lenders to no avail. Often, this trial and error approach can result in multiple hard inquiries in your account which can easily lead to a drop in your credit score.
Furthermore, multiple hard inquiries on your credit report might act as a red flag to some lenders as it shows that most lenders aren’t willing to work with you. You will need to provide information concerning your employment history, income level, current debt posture, and other documents that will be needed in the loan application process itself.
Alternatives To a 20% Down Payment
Most lenders will ask for a 20% down payment before they can even offer you a loan. Otherwise, you will have to use private mortgage insurance if you pay a lower amount. Luckily, you can take advantage of common down payment assistance programs to pay the loans.
https://cdn.pixabay.com/photo/2016/05/21/21/52/house-1407562_1280.jpg
Additionally, you can also take advantage of FHA loans that might allow you to pay as little as 3.5% down payments. If you served in the military, you could qualify for VA loans which are cheaper.
Conclusion
Mortgage and student loan debt will take a lifetime to pay off. As a result, only apply for a mortgage if you can manage both. The trick is to assess your current and future financial situation accordingly.
