Besides high home prices and the competitive real estate market, millennials struggle to purchase a home due to student loans. But it’s not impossible! The National Association of REALTORS® found that over 20% of Americans who bought their homes last year had student loans. Be part of 22% of Americans who have student loans and own a home by asking yourself these three questions.
1. Is it the right time?
Timing is an important factor when getting a mortgage because the economy affects mortgage rates. Plus, you want to make sure all the critical factors that determine your acceptance for a mortgage are all in your favor too. Since the pandemic, mortgage rates have hit historic lows, which is excellent news for homebuyers! But a mortgage rate is only one factor when choosing the right mortgage and lender for you.
Another factor determining your mortgage is how long you’ve been employed at your current company. A long employment history means your income is more stable and reliable in the eyes of a lender. The last factor to consider is if you have other debt in addition to your student loans. If you pay that down as much as possible before applying for a mortgage, it can increase your odds of getting approved. It can also help you secure a better term and interest rate, all things that will help you save money!
2. How’s your credit score?
Your credit score plays a huge role in the mortgage approval process. While you may be paying your bills on time, there might be some errors on your credit report. It’s rare, but it’s better to be safe than sorry, as the saying goes. First, check that your credit score is error-free. You can get a copy of your credit report from all three major credit bureaus, Equifax, Experian, and TransUnion, on AnnualCreditReport.com.
Next, check your credit score number. Most lenders require a credit score of at least 620, but over 740 will give you the best rates. If your score is below any of those benchmarks, you may want to improve your credit score before applying.
3. What’s your DTI?
DTI stands for debt-to-income ratio, and you want a low number. The number tells how much your monthly income goes to debts. To calculate your DTI, add up your monthly minimum debt payments and divide by your monthly gross pre-tax income.
Lenders look at both types of DTI: front-end and back-end. Front-end only covers housing-related expenses like monthly mortgage payment, mortgage insurance, etc. Back-end DTI covers all of your monthly debt obligations like student loans, credit card debt, and future mortgage payments. As a homebuyer, you’ll want a front-end DTI of no more than 28% and a back-end DTI of no more than 36%. But that’s just a guideline as factors will depend on the lender.