The combination of the country’s rising student debt crisis and housing crisis has made it all too difficult—if not impossible—for college graduates to buy a home before their 40s. For this reason, a lot of millennials (people in their late 20s to mid-30s) are putting off buying a home until later in life. In fact, the average age of first-time homebuyers in 2019 was 3 years old, which is significantly older than previous generations.
One of the biggest reasons why younger generations delay buying a home is student debt. On average, the federal student loan debt is $36, 510 per borrow, while private student loan debt averages around $54,921 per borrower.
With tens—if not hundreds—of thousands of dollars of debt before they even enter the workforce, many of the younger generations are left with no choice but to wait until they either become more financially stable or pay off their debts before buying a house. For many aspiring home buyers, this can take many years or even decades.
However, buying a home while paying off student loan debt is not totally impossible. While these financial strategies may not work for everybody, incorporating them into your lifestyle can increase your chances of becoming a homeowner with student debt and before you hit your late 30s:
Understand the system
One of the most common mistakes that first-time homebuyers make is getting a mortgage without fully understanding how the system works. Some regret buying their home for the price that they bought it for because they had no idea what a “buyer’s market” is. Others have an oversimplified view of what a mortgage is that makes it difficult to leverage one’s income. Whatever the case may be, failure to understand the system before buying into them can lead to a lot of missed opportunities and financial setbacks.
Luckily, using tools such as a reliable mortgage rate tracker and taking enough time to study the mortgage process can increase your chances of buying a house that you won’t regret. With student loans, it is all the more important to ensure that your house will make your life easier—not harder—when it comes to finances.
Calculate your DTI ratio
The debt-to-income ratio represents the amount of your income that goes to paying off debt. If you have student loans, this number can be substantially higher than a person without. Furthermore, you may have debt in other forms, such as an auto loan, credit card debt, insurance, and personal loans.
DTI ratio is often inversely proportional to your chances of securing a good mortgage. Most mortgage lenders are unwilling to loan to someone who has a high amount of debt because high debt represents a risky borrower. Even if you manage to get a mortgage with a high DTI, the lender will probably put high-interest rates on your loan to help secure their money.
That said, calculate your DTI ratio before looking for lenders, and only include the minimum amount that you have to pay every month. For example, if you only have to pay $200 a month in student loans (minimum), only include that amount in your calculation. The same goes for your other debts.
If your DTI ratio is high, work on lowering it before you apply for a loan. For example, you can try reconsolidating your debts, paying them down as much as possible, or enrolling in an income-based repayment plan for your student loans.
Work on your credit score
Credit score is an important factor in mortgage applications, regardless if you have student loans or not. Your credit score paints a picture of your financial responsibility and your risk level as a borrower, which lenders will use to evaluate your application.
Even if you’ve managed to ruin your credit during your college years, it’s not too late to work on it now. Here are several ways to improve your credit score before applying for a mortgage:
- Pay your bills on time, especially your student loan payments
- Decrease your credit utilization rate as much as possible
- Avoid applying for new lines of credit before applying for a mortgage
- Keep unused accounts open; this can help you improve your credit history
- Avoid taking on new debts before applying for a mortgage, e.g. new auto loan, large expenses on credit cards, etc.
Buying a house while paying off student loans can be tricky, but definitely not impossible. By applying these strategies and generally taking better control of your finances, you can increase your chances of getting approved for a mortgage with good interest rates, especially if you are aiming for a starter house.