Do you feel like your student loan debt is holding you back from buying a home? You’re not alone. Many first-time buyers think student debt makes it impossible to buy a home. That’s not the case! You’ll be surprised at how possible it is to buy a home in Northern Colorado despite having what feels like crushing amounts of student loan debt. “Can’t stop, won’t stop” is my motto. Don’t let student debt stand in your way when it comes to being a homeowner. There are ways to work with lenders and assistance programs to make your first home purchase a reality. This article will explore affordable options to fit your situation.
How Lenders Look at Student Debt
Let’s start with the basics— when you’re applying for a home mortgage loan, your lender will look at your debt-to-income ratio or DTI. They compare the amount of monthly recurring debt compared to your gross monthly income. In the eyes of your lender, your DTI is more important than your credit score or how much money you have for a down payment.
Most lenders like to stick to the 28/36 rule. To put it simply:
- Your maximum household expenses should not exceed 28% of your gross monthly income.
- Your total household debt shouldn’t exceed 36% of your gross monthly income.
Keep in mind that your DTI is calculated separately from your credit score. It looks only at your current amount of debt obligation compared to your current income. That’s not to say paying your bills on time or maintaining your credit score isn’t important; do that too!
How to Lower Your DTI
To lower your DTI, you need to reduce your monthly debt and obligations. You can do that in several ways. I recommend starting with your student loans. Contact your lenders to see if you can lower your monthly payments. Consider the following options:
- Graduated repayment plans— switching to a graduated repayment plan means your monthly payments start low and increase every two years as your income rises. This plan is best for young leaders or those in the early stages of student debt repayment.
- Loan consolidation— If you have more than one student loan, consider combining your loans into one. If you do it right, you’ll lower your overall interest rate. That means reducing your monthly student loan payments and the total amount you pay over time.
- Lengthen your payback term— Many lenders allow you to spread your payments over a more extended period. In the long run, this plan will add more interest to your balance, and you will pay more overall. However, as a short-term solution, this plan lowers your monthly costs and makes other loans more possible!
Examine all of your financial obligations and find other ways to lower your DTI:
- Consider bumping up your monthly income with a side job. Every little bit could help your cash flow and savings.
- See if you can negotiate a lower minimum monthly payment on your credit cards— especially one on the higher side. Credit card companies are willing to work with you if you have a good credit score and payment history.
Shop Around for a Lender
When you have sizeable student loan debt, you need to find a mortgage lender willing to work with you and offer programs geared toward borrowers like you. Steer clear of lenders who look primarily at your student loan debt balance rather than your DTI.
Many lenders work with state and federal assistance programs. These agencies have a better track record when dealing with buyers who have student debt. Your college or graduate degree is worth something. It indicates to a lender that it will continue advancing your career and earnings. Additionally, almost every Colorado county offers some assistance program for home buyers. There are many local programs available to help you buy a home in Northern Colorado. Check out the U.S. Department of Housing and Development Colorado to see if you qualify!
Tap into Federal Loan Programs
Several government programs offer loans to borrowers with student loans. Each one has different requirements, and they don’t apply to every. Still, it’s worth a quick look to see if you qualify.
- Fannie Mae HomeReady Mortgage— This program is designed for those with a low income but a good credit score. Ideal HomeReady borrowers are low income, have limited cash for a down payment, are looking to purchase or refinance, and have a credit score above 620.
- VA Loan Guaranty— Buyers who have served in the military can qualify for a loan with a 41% DTI.
- Federal Housing Administration (FHA) Loan – If you are eligible for this loan, the FHA insures the loan so your lender can offer you a better deal. That translates to lower down payments and easy credit qualifying.
Are You Ready?
Homeownership is a big financial commitment, but you may already handle sizeable monthly housing costs. The average price of rent in Colorado is at an all-time high. You may be ready to invest that money in your own home! As a first-time buyer, be prepared to put in hard work and questions.
Home buying takes a lot of planning, even if you don’t have student loans. If you’re even considering buying a home in the near future, reach out! I am here to help determine if and when homeownership is right for you. Let’s connect so we can come up with a plan to turn your home-buying dreams into a reality.
Ready to get the ball rolling on your home search? The first step is an initial meeting with me! Schedule yours here today!
I'm Lauren Haug! I'm a teacher-turned-real estate agent, and I teach people how to build wealth through real estate in Northern Colorado.
schedule your free consultation