5 must-do's if you want to buy a home but have student debt

Before you apply for a mortgage, you can take a few steps to increase your odds of becoming a homeowner.
Because women earn less than men, they are more likely to take more time to pay off their student loan debt -- and put off large purchases, like buying a home.
Because women earn less than men, they are more likely to take more time to pay off their student loan debt -- and put off large purchases, like buying a home.Getty Images

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By Laura Haverty

As students head off to college this fall, many will start to accumulate student loan debt. And by the time they graduate, they’ll owe tens of thousands of dollars.

Because women in particular earn less than men, they are more likely to take more time to pay off their student loan debt. Women of color fare even worse. On average, it will take up 111 percent of an African-American woman’s first year of income to pay off her student loan debt balance.

That kind of debt, even in deferred status, can keep women from making other large purchases, such as buying a home. And that’s unfortunate, because buying a home is a great way to invest in yourself and your future. “If your mortgage payment will be comparable to your rent, it’s often a smart move to take steps to buy,” Sarah Pierce, head of sales for online lender Better.com, told Know Your Value.

How lenders view debt

Just having student debt won’t prevent you from getting a mortgage. “But combined with other monthly debt payments, such as for a car or credit cards, your debt-to-income ratio, or DTI, may be pushed too high to qualify,” said Richard Barenblatt, a mortgage specialist at Guardhill Financial Corp., a lender based in New York City.

Mortgage lenders use your credit score, along with your assets, down payment amount and DTI ratio to gauge your creditworthiness.

To calculate DTI, lenders add your monthly debt payments together and divide them by your gross monthly income (what you’ve earned before taxes and other deductions). So, if you’re paying $1,500 in rent, $100 for a car loan and $400 for other debts, your monthly debt payment is $2,000. If your gross monthly income is $6,000, your debt-to-income ratio is 33 percent.

For lenders, a low DTI ratio demonstrates you have a good balance between debt and income; a high DTI indicates you could run into trouble making monthly payments, says Barenblatt. And in general, you’ll need a credit score of 680 or higher, and a back-end DTI ratio 45 percent or lower to get the best mortgage loan interest rates and loan costs.

Paying off your student debt

According to a recent Student Loan Hero survey, those with lower initial balances pay their loans off faster. But how they go about it varies. Sixty-one percent paid above the minimum payment each month, 32 percent used extra cash to make lump-sum payments and 17 percent cut their spending. About one in 10 respondents also took advantage of refinancing student loans, applying raises to student loan repayment and picking up a side hustle to pay more toward student debt.

Once their student loans were paid off, almost one-third of respondents said they were going to save for a down payment to buy a home.

5 ways to boost your profile with lenders

Before you apply for a mortgage, you can take a few steps to ensure you’ll make a good impression:

1. Improve your credit score

Paying your bills on time will help raise or maintain your credit score. “Pay in full before or on your due date, and manage your credit utilization,” advised Pierce. Ten percent of borrowers served by Better.com loans have student debt. Out of that group, she said, the average credit score is in the 700s.

2. Lower your DTI ratio

If you can reduce the monthly amount you have to pay to cover your debt commitments by refinancing your student loans or paying off a credit card or two, this can help lower your DTI and increase your financing options.

3. Find down-payment assistance

There are a number of local and state down payment assistance programs, including some that allow you to use sweat equity if you want to build a new home.

4. Put less down

Some conventional loan programs require just 3 percent down on a home. Low-to-moderate income buyers may qualify for an FHA loan, which offer a 3.5 percent down payment. If you’re buying in a rural area, you might qualify for a USDA loan, which requires no-down payment or if you or a family member have served in the military, consider a zero-down VA loan. “I always recommend to talk to a lender sooner rather than later,” said Pierce. “Every situation is unique and if there are ways you can buy sooner, that’s often the best option.”

5. Get pre-approved

Pre-approval can help you understand how much you can qualify for, and how much you’ll have to put down. Additionally, sellers are likely to take you more seriously once you have a pre-approval in place because they know the bank has already committed to providing you with financing.