Why Student Loans May Prevent You From Buying A Home

If you worry that your student loan debt will hurt your ability to buy a home, then you're not alone.

Here's what you need to know and what to do about it.

New Report: Student Loans and Housing

A new report from NeighborWorks America says that although 92% of adults believe that home ownership is part of The American Dream, many Americans believe that their student loan debt will hurt their ability to buy a home.

According to the latest student loan statistics from personal finance site Make Lemonade, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loans.

The NeighborWorks report found in 2018 that:

  • 36% of adults knew someone who delayed the purchase of a home because of student loan debt.
  • Among Millennials (adults ages 18-34), 59% knew someone who delayed buying a home because of student loan debt.
  • 85% of adults with student loan debt and 87% of Millennials reported worrying about their debt some, most or all of the time.

Sound familiar?

The good news is that student loan debt doesn't need to prevent you from living The American Dream.

Here are 5 action steps that you can take right now:

5 Action Steps To Buy A Home (Even If You Have Student Loans)

1. Focus on your credit score

FICO credit scores are among the most frequently used credit scores, and range from 350-800 (the higher, the better). A consumer with a credit score of 750 or higher is considered to have excellent credit, while a consumer with a credit score below 600 is considered to have poor credit.

To qualify for a mortgage and get a low mortgage rate, your credit score matters.

Each credit bureau collects information on your credit history and develops a credit score that lenders use to assess your riskiness as a borrower. If you find an error, you should report it to the credit bureau immediately so that it can be corrected.

2. Manage your debt-to-income ratio

Many lenders evaluate your debt-to-income ratio when making credit decisions, which could impact the interest rate you receive.

A debt-to-income ratio is your monthly debt payments as a percentage of your monthly income. Lenders focus on this ratio to determine whether you have enough excess cash to cover your living expenses plus your debt obligations.

Since a debt-to-income ratio has two components (debt and income), the best way to lower your debt-to-income ratio is to:

  • repay existing debt;
  • earn more income; or
  • do both

3. Look for down payment assistance

There are various types of down payment assistance, even if you have student loans.

Here are a few:

  • FHA loans - federal loan through the Federal Housing Authority
  • USDA loans - zero down mortgages for rural and suburban homeowners
  • VA loans - if military service

There are federal, state and local assistance programs as well so be on the look out.

4. Consolidate credit card debt with a personal loan

Option 1: pay off your credit card balance before applying for a mortgage.

Option 2: if that's not possible, consolidate your credit card debt into a single personal loan at a lower interest rate than your current credit card interest rate.

A personal loan therefore can save you interest expense over the repayment term, which is typically 3-7 years depending on your lender.

A personal loan also can improve your credit score because a personal loan is an installment loan, carries a fixed repayment term. Credit cards, however, are revolving loans and have no fixed repayment term. Therefore, when you swap credit card debt for a personal loan, you can lower your credit utilization and also diversify your debt types.

5. Refinance your student loans

Student loan refinancing is one of the most effective strategies to save money and pay off your student loans faster.

There are student loan refinance lenders who offer interest rates as low as 2.50%, which is substantially lower than federal student loans and in-school private loan interest rates.

Each lender has its own requirements, which may include your credit profile, minimum income, debt-to-income and monthly free cash flow. Student loan refinancing works with federal student loans, private student loans or both.

If you make these 5 moves, you'll be better positioned to manage your student loans and still buy your dream home.

And, you'll have a greater shot to live The American Dream.

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