Americans are struggling with student loan debt. For those with debt, you might think that homeownership is out of your reach. Many people believe that student loans are a hurdle to living the American Dream. However, those loans do not automatically disqualify you from a home loan. If you have been paying off your loans, then there is still a chance to reach your homeownership dreams. The premier new home builder in Chester County, Southdown Homes, has some ways that can help increase your chances of securing a home loan with student loan debt.
Many College Graduates Carry Debt
If you want to purchase a home, you need to qualify for a mortgage. In one study, over 75 percent of college graduates believed that their student loans were an obstacle to car or homeownership. Today, there are 44 million college graduates who owe a combined $1.5 trillion in student loan debt. Many of these borrowers have a balance of at least $100,000, with most of them are under the age of 40. With statistics like that, it may seem impossible to get a loan for a home. A burden of college debt can be a challenge to navigate the process for a mortgage. However, there is good news for you. With a few actionable steps, you can get out of debt and make that dream of homeownership a real possibility.
Raise Your Credit Score
A credit score is the most important thing for mortgage qualification. If you decide to take the step of buying a home, make sure to treat your credit score as the top priority. You should check your credit score on a regular basis, and make sure that all the information is accurate. Many people only focus on their actual credit score numbers when checking their credit report, but negative marks can lower your score. If you find a discrepancy in your report, you need to contact the credit bureau to get it fixed at least every three months.
What Credit Score is Used for Mortgage?
Most lenders use FICO credit scores. This system is the most trusted and accurate in the industry. Your credit history is analyzed, and you are assigned a credit score. The scores range from 350 to 800, and you want to aim for the highest score possible. A credit score of 750 or higher is considered to be in the excellent range, while those with a 600 or less score are rated as having poor credit. The lenders use the score to estimate their credit risks. If you have a lower score, then you are a higher risk to the lender for defaulting on the loan. Lenders want to know that you will pay them back the full amount of the loan. Credit scores can affect everything from your chances of approval to the percentage rate of interest.
If your credit score is less than stellar, then you should immediately get to work. However, these changes do not happen overnight. It takes time to bump up your credit rating. You need a plan to repair those poor numbers by reviewing your credit score six months before house hunting. You should focus on paying all your bills on time. Lenders put a lot of weight on your payment history. It shows them that you are financially responsible enough to handle another loan.
How to Raise Your Credit Score Fast
After a few on-time payments, you should start to see an increase in your score. With the FICO scores, your recent payments are more heavily weighted than past payments. Most lenders want to know that you have a history of on-time and steady bill payments. Don’t think you need to just focus on significant loans either. You need a solid history of responsible credit with student loans, car loans, and credit card payments. If you do have any delinquent accounts, make sure to pay off that balance first. A “paid in full” account will help to counteract any late payments in the past. For those who have a hard time keeping on schedule, you can always set your bills for automatic payments. Those settings will help you to pay on time so that you never forget another payment again.
Keep Your Credit Utilization Low
Credit utilization is almost as important as a credit score. Lenders want to see how much you spend on your credit cards. That number is calculated as a percentage of your credit limit. You want to keep your credit utilization low. If you need to determine your utilization, divide your monthly credit card spending by the total available credit into all your accounts. In an ideal situation, you should use less than 30 percent of your available credit per month. For example, you can have a $10,000 credit limit and spend $3,000 for the month. With those numbers, you have a 30 percent credit utilization. If you keep the usage below 10 percent, then that is even better for your financial health.
How to Keep Credit Utilization Low
For those who want to lower the credit utilization numbers, there are a few things that you can do. If you have any older credit card accounts, it might be tempting to close them. However, those lines of credits are still factored into your utilization numbers. By closing those accounts, you can raise the total percentage of your credit utilization. You also want to keep those accounts open because it also increases the longevity of your credit history. Many lenders want to work with borrowers who have an established credit history.
If you are looking for another way to lower your credit utilization, you might want to ask the credit card lender to raise your limit. This option can be great for those who have seen a bump in their salary. You might also ask for an increase if you have an established history with the bank. Many people open cards when their income is low, but they can get a boost in credit with a higher salary. However, you might want to think twice about asking for a credit increase. In some cases, the bank will have to make a “hard pull” on your credit, and that could lower your credit score. Before you raise your credit card limit, make sure to check with your bank.
Finally, you can keep on top of your credit utilization in other ways. Many banks offer to give you an automatic balance alert for your credit utilization. You can make sure that you don’t go over 30 percent for the month. It is essential to make payments on the balance a few times during the month. These payments can also help to reduce your credit utilization.
Lower Your Debt-to-Income Ratio
If you want to buy a home with any type of student loan debt, your debt-to-income ratio (DTI) will become another important factor for you. Many lenders use your DTI when making a decision for your loan. These decisions can affect the interest rate of your mortgage. The DTI is the total amount of bills that you must pay each month. For example, your student loans, credit card payments, and other bills are divided by the amount that you earn. That percentage determines if you can afford another payment for the month. Lenders want to know that you have enough cash to cover all your expenses plus your recurring debt obligations. Potential lenders want that DTI number as low as possible. For most people, you should be spending no more than 36 percent of your income on repaying debt.
Tricks to Lower Debt to Income Ratio When Buying a Home
For those with higher DTIs, there are several ways to improve your numbers. Your main goal is to lower your debt as you build up your income. First of all, you want to repay all your existing debt as soon as possible. When looking at your credit cards, make sure to pay off the card with the highest monthly payments. However, many people cannot afford to pay off a large amount of debt. You might want to think about consolidating your credit card debt with a personal loan. This loan will allow you to move all those loans into a single one at a lower interest rate than most credit cards can offer. These loans can help you to save any interest over your current repayment terms, which is around 3 to 7 years for many banks and lenders.
In many cases, a personal loan will help you to improve your credit score, and they are considered an installment loan with a fixed repayment term. Credit cards are considered revolving loans with no fixed repayment terms. When you consolidate those credit card payments into a personal loan, you are helping diversify your debt types and lower your credit utilization.
If you have many student loans, you should think about consolidating or refinancing your debt at a lower interest rate. You can refinance federal, private, or a combination of both student loans. When the lender sees a lower interest rate, it is a signal that you are working to pay off these loans. Some lenders can refinance your loans for rates as low as 2.5 to 3 percent, which are lower than private or federal loan interest rates. However, every bank has its own underwriting and eligibility requirements for refinancing a loan. In many cases, they may look at your credit scores, debt-to-income, and cash flow as determining factors.
Once you have accomplished that, you should focus on more cash in your hand for a higher stream of income. If you have a specialized skill set, think about making some extra cash on the side. Many people take on a second job or side hustle as a way to add more income to their bank accounts. You want to show the bank that you can afford to pay your existing bills as you take on a mortgage for your home. Lenders want to know that you have the funds to pay back on the loan.
Get Pre Qualified for a Mortgage
Many people, start searching for a home and then apply for a mortgage. If you are serious about homeownership, you will want to reverse those steps. You can find many lenders who will pre-approve you for a mortgage. With that approval, you will know precisely what you can afford and not have unrealistic expectations as you hunt for a home. During the pre-approval process, lenders will look at your credit score, employment history, assets, and other documents. Make sure to have everything ready so that you can breeze through the application process.
Choose the Best Down Payment Option for Your Mortgage
Finally, you will need a down payment for your dream house. However, it can be challenging to save up when you are paying off your student loans. There are several types of down payment assistance programs available. Many of these programs will allow you to put down less than 20 percent on a home. The Federal Housing Authority (FHA) is a federal loan, and you can put down as little as 2.5 percent. If you have served in the military, you can qualify for a VA loan for a lower down payment. The USDA even offers its own loans as well. These zero-down mortgages are available in certain rural and suburban areas. You can also check with your own community, state, or other federal programs.
Many places have programs that can help you with a down payment. You might have to do some research, but it will help you to secure a down payment. These programs are designed to encourage people to make their dreams of homeownership a reality.
Owning a home has always been considered the ultimate American Dream achievement. But with student loan debt, that dream can seem impossible to achieve. The good news is it doesn’t have to be! With some careful planning and money management tips, you too can own your new house in no time. Southdown Homes offers some of the best and most affordable new homes in the Chester County, PA area. Reach out to us and let us help get you into a beautiful new construction home today!