It can be tricky when applying for a loan while still paying off another. Lenders prefer to approve borrowers with the least debt. And that is because when you take a second loan, you increase your risk of defaulting on one of the loans. In some cases, even both.
That consideration becomes even more relevant when deciding to take on a mortgage while you pay back your student loans. We used these two examples because that is the essential form of debt most people face.
Aside from the challenges of getting approved, student loans can make it more challenging to save for important things such as closing costs, moving expenses, and down payment.
How Student Loans Affect Buying A House
There are several various ways your student loans affect your finances, and that includes savings potential, credit score, and debt-to-income ratio. All these could add to your capacity to purchase a house.
Student Loans Can Increase Your Debt-to-Income Ratio
Loan servicers use the debt-to-income ratio to decide the extent of a mortgage they can approve for you. DTI entails all your monthly loan payments divided by your monthly gross income.
Most lenders require your overall DTI ratio to be 43% or less, including your proposed mortgage payment. If you have a high student loan payment, it can move your DTI past 43%. When that happens, it becomes challenging to be eligible to get the kind of house you want.
Student Loans Affect Your Ability To Save
You need an upfront down payment to purchase a house, which usually is several thousand dollars. If you have student loan payments, it can be challenging to save for a down payment and your monthly student loan bills. All these can affect your ability to purchase a house.
Student Loans Affect Your Credit Score
When it comes to your credit score, payment history is vital, accounting for 35% of the total score. If you have a timely track record, your credit score increases. On the other hand, if you delay your monthly payments, you can decrease your chances of securing a mortgage.
Mortgage lenders significantly consider your credit score when deciding your approval chances, including your interest rate. If you have had challenges making on-time student loan payments, your chances of qualifying for a mortgage could be dim.
The good news is that the Credit bureaus usually pay more attention to recent mistakes than past ones. That means any mistakes you make at the initial stage of your student loan repayment will not be considered.
Regardless of your student loan, you can still buy a house. You can apply for down payment grants through the down payment assistance programs. These grants cover all or part of your down payment. However, you usually need a credit score of 600 or more.
There are other alternatives, such as looking into 0% down payment loans and decreasing your debt-to-income ratio.