Does student loan debt affect your home loan eligibility?
Getting a new mortgage while having an existing student loan debt is tough. You will have to manage your existing student loan in a decent way. That way whenever you apply for a home loan, your debt-to-income ratio and credit score doesn't hurt your eligibility and affordability.
So, let us know more about those factors and how to manage them in order to buy your house.
1. High debt-to-income ratio (DTI) means a big 'No' from the lender
DTI is a criteria which lenders will verify to judge your ability for making monthly installments. After you submit an application, the lender will do calculations to determine your DTI. They will add up all your current debts with the expected mortgage amount and it will be divided by your monthly gross earnings. You must know that the gross income will be considered before deducting the taxes and insurance cost.
Your current debts will include car loans, credit card debts, any existing home loan and last but not the least student loans. Utility costs are not part of these debts and they are exempted while calculating DTI. Generally, if your DTI exceeds 43%, your loan application will be denied by most of the lenders and banks. So, it is your main target to keep your DTI as low as possible for you. You may control your expenses to save more money and pay off the existing debts. This is the quickest way to lower your DTI.
2. Flexible repayment options drop DTI ratio and increase your hope for a new home
Managing your other debts will be much difficult for you initially. Car loan payments can't be managed without refinancing the loan. Even your credit card bills can not be settled without paying them in full or opting a settlement program. But if you have an existing federal student loan, you can switch the repayment plan to the graduated plan from the standard one.
3. Low credit score limits your home loan options
Student loans are one of the most important factors which affects the credit score of a borrower heavily. Paying off your student loan debt on time is the easiest way to boost your credit-worthiness. While checking your mortgage application, the lender will use your credit score to verify whether you are eligible or not. They will also consider the credit score while deciding the interest rate of your mortgage. High credit score boosts your eligibility and you will get the lowest interest rates along with multiple loan choices and payment options. Low score borrowers or subprime borrowers doesn't have much choices in terms of selecting loans and also in payment facilities. It is also very common that most of the loan application with low credit scores have been rejected.
Lenders can easily detect your credit scores before approving the loan request. If federal student loans are not getting paid for consecutive 60 days, it will be considered as delinquent and reports will be filed to the credit bureaus. Private student loans are considered as delinquent or defaulted if the borrower misses one single payment and it would hurt your credit score very badly.
To keep this situation on track, you might need to contact your student loan provider asap. You still need to pay all your due payments to make your account current. By rehabilitating your loan, you can clean your credit history after removing the default - though the delinquency will remain unchanged.
If you want to buy a home after leaving your college and want to arrange the fund by taking a mortgage on your own, then you must avoid private student loans. Federal student loans are the best option for you as you might need to lower your monthly payments to balance your credit score and DTI within normal level.