Tips to afford a mortgage with student loan debt

  • 1. Can you afford a home?
  • 2. How much can you afford?
  • 3. Have you calculated the other DTI type?
  • 4. Can an FHA loan help you?
  • 5. What if your student loans are postponed?
  • 6. Not qualifying? Try these remedies
  • 7. But can you really afford it?
  • The Bottom Line

If you're paying off student loans, you may think it's impossible to buy a home. Not so. If your student loan is reasonable, you may qualify for a home. But there are some things you should know (and think about) before taking on more debt. Here are seven questions to consider.

1. Can you afford to buy a home?

Before you accept the idea of a mortgage, ask yourself if you can afford it. The answer is hidden in a so-called debt-to-income ratio (DTI). You can calculate your DTI by adding up all your monthly debt payments and dividing the total by your gross monthly income.

According to the Consumer Financial Protection Bureau, the maximum DTI you can have (including your expected mortgage expenses) is 43% in most cases. But for your own financial security, you should aim for a much lower ratio. Most lenders want your DTI below 36%.

Do not rely on the bank to tell you if you can afford a house. You have to find out for yourself.

2. How much can you afford?

If all your debts are near 36% without adding a mortgage payment, the chances are slim that you can qualify for a mortgage. But if your DTI is significantly less, play with the numbers. Add a mortgage payment into the calculations and see where you come out. If you have your eye on a home that would result in a $1, 500 loan payment including taxes, private mortgage insurance (PMI) and any other fees, add this figure to your calculations. If you score below 43%, you have passed this test. (See: How much mortgage can you afford? And owing too much on a mortgage?)

3. Have you calculated the other type of DTI?

We looked at what some people call back-end DTI or back-end ratio. That's the sum of all your debt. The front-end ratio only looks at your housing costs. Simply divide your monthly mortgage payment by your gross income. Most lenders want your front-end DTI to be under 28%, although some can go as high as 36%. Have you passed this test?

4. Can an FHA loan help you?

There is a misconception that people who can't qualify for a conventional loan can qualify for an FHA loan. In some cases, that's correct, but just like with conventional loans, the Federal Housing Administration (FHA) has set DTI ratios that you must meet. Front-end DTI cannot exceed 31% and back-end DTI must be 43% or less.

However, FHA loans often allow for lower credit scores and lower down payments, and closing costs could be covered. (See also Understanding FHA home loans .)

5. What if your student loans are postponed?

As with many individual circumstances, the answer to this question sometimes depends on the lender.In the case of FHA loans, if you have deferred student loans, the lender must estimate your monthly payment at 2% of your total loan balance, even if you will be on an amortization schedule with a lower payment.

For conventional loans, it can be as low as 1% of your account balance. If the loan is deferred for more than a year, some lenders will not consider the debt as part of your current DTI.

6. Not qualifying? Try these remedies

If you do not meet the qualifications outlined here, your goals should be one or all of these three things: reduce your debt, increase your income, or reduce the loan amount. The first two are much easier said than done and can take a while, but finding less house is very realistic.

If you're already as low as you can go at the front door, it may make sense to rent until you can address your debt load and income level.

7. But can you really afford it?

The most important question may not be whether you can afford a mortgage according to industry standards, but whether it is affordable according to your own standards. Do you have an emergency fund? Do you have adequate insurance? Do you have transportation resources that have a good chance of surviving for the next few years? If you are a couple and your finances are based on two incomes, plan on both of you continuing to work?

Before you take on another payment, you should have a plan to deal with the debt you have now (see How to Create a Plan to Handle College Debt ). Renting gives you the flexibility you need until you have a better financial footing later on. It's not necessarily cheaper to rent, but you won't be locked into a mortgage and if something goes wrong with the house, in most cases the landlord has to pay for the repairs, not you.

The Bottom Line

Although the odds seem slim, a Zillow study found that a person who earned a bachelor's degree without student loans has a 70% chance of owning a home. Add $50, 000 of that person's student loan debt and his or her likelihood of homeownership only drops to 66%.

The study proves that most people find ways to afford a home and pay off student debt at the same time. The key question to ask is: Does it make sense for you and your family?

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