Buying A House With Student Debt Youre Not Alone
Student loan debt can feel like a burden. But it doesnt have to hold you back from your goals especially buying a home.
As mortgage advisor Ivan Simental said in a recent episode of The Mortgage Reports Podcast, You absolutely can buy a house with student loan debt.
Are you hoping to buy a home but have student loan debt in tow? Heres what to do.
Listen to Ivan on The Mortgage Reports Podcast!
Student Debt Becomes The Worst Kind Of Debt
This year, presidential candidates Hillary Clinton and Donald Trump are promising reforms. But most proposed fixes offer limited relief for the 42 million Americans already saddled with student loans, such as Anita Brewer.
Brewer wanted to be a fashion designer when she enrolled at the Los Angeles campus of American InterContinental University in 2005.
The school was hot. Its parent company, Career Education Corp., was beloved by Wall Street. In that era, investment firms saw huge potential for high profits and little risk in owning for-profit schools.
Their business model was simple: The more students they recruited who were eligible for a federal loan, the more money they made. Never mind that many students dropped out before earning a diploma and were left with debts they couldnt repay.
Brewer had no idea that Career Educations schools already were a magnet for complaints about poor academic quality, massive student turnover, high student debt and securities fraud.
The year she arrived, the trouble exploded into view. An accrediting agency put the school on probation. Then, in 2008, the company announced that it would close the L.A. campus. By that time, Brewer had taken out $60,000 in federal and private loans.
I worked so hard not to be in this situation right now, she said. I sacrificed so much to go to school and get an education. But I cant get an apartment, I cant get a cellphone, I cant get a car, I cant get anything because my credit is shot to hell.
Women And Student Loan Debt By The Numbers: Why Its Concerning To Experts
Theres a direct correlation between higher education and higher salaries but, for millions of Americans, the dream of college is attainable only through the nightmare of student debt. The countrys 45 million student borrowers owe a collective $1.7 trillion, according to Forbes.
For women, the financial burden of education is especially high.
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GOBankingRates surveyed more than 1,000 women from all over the country about their experiences with student debt, and the results show that gender has a lot to do with what you can expect to pay for the privilege of higher education.
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While Youre Waiting Get All Your Bills In Order
The grace period can be the perfect time to work on paying down credit cards and other bills.
When you apply for a home loan, lenders put a lot of emphasis on your monthly debt-to-income ratio. This must be below 43% to qualify for most mortgages, although keeping it below 36% is ideal to make sure you can keep up with all your monthly billsand to get the best terms on a loan.
Even if you have a boatful of student loan debt, paying down other bills can significantly lower that debt-to-income ratio. And thatll also have the bonus effect of improving your credit score, making you all the more attractive to lenders.
Strategy : Reduce Your Debttoincome Ratio
Your debttoincome ratio reflects how much of your monthly income is taken up by debts, and it plays a major role in any loan application.
According to Simental, DTI is particularly important when buying a house.
We want to make sure that you are 1) responsible and 2) you can actually afford the payment, he said.
Typically, mortgage lenders will assume your student loan payment is 0.5% to 1% of the total loan amount. Theyll then add this payment to any other debt payments you might have and measure it against your income. This lets them know what mortgage payment you can comfortably afford.
To ensure you have the highest chances of qualifying for a mortgage, youll want to keep your debttoincome ratio as low as possible. These five tips can help:
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Loan Forgiveness Programs For Americorps
Borrowers serving full time in AmeriCorps are eligible for Public Service Loan Forgiveness. Additionally, the Segal AmeriCorps Education Award is granted to individuals who meet and complete the approved terms of national service in the AmeriCorps program. This award can be put toward your education costs at any approved postsecondary educational institution or GI Bill-approved program.
You can also use funds from the award to repay any qualifying student loans. The amount is equal to the maximum amount of a Pell Grant, which is $6,495 for the 2021-22 award year. This amount can change from year to year.
Individuals who have completed their service in an approved AmeriCorps program can also be eligible to have up to 100 percent of interest payments accrued during their time of service paid for by the Office of the National Service Trust . This is only possible for those who have successfully completed their term of service and have earned the Segal AmeriCorps Education award.
Put Your Dreams On Hold
Student loan debt affects more than your financial independence and your standard of living. It also determines which dreams you’re able to pursue and which ones will become a distant memory. You may find yourself sacrificing a job that offers you more fulfillment and purpose for a career with a higher salary.
For instance, you may have dreams of working for a nonprofit organization. But you may have to give that up when you realize that the accompanying salary may not live up to your financial obligations. In fact, you’ll probably have to forego these aspirations for a job that pays more to cover your student loan payments.
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Final Thoughts On Buying A House With Student Loans
You dont need to be debt-free to buy a home, but you may have trouble getting a loan if you have too much debt. Calculate your DTI ratio and compare your monthly debts to your gross income. Pay down more of your debt before you buy a home if your DTI ratio is higher than 50%.
Also, make sure your financial situation is stable before you invest in a home. You might want to be sure youre on a solid repayment plan, have funds for a down payment and are contributing toward retirement before you shop for a loan. You might also want to increase your income or lower your debt before you apply for a loan.
1Participation in the Verified Approval program is based on an underwriters comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage®’s control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. Additional conditions or exclusions may apply.
Low rates were a big story in 2020. It was a great year to refinance!
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What If I Dont Want My Student Loan Sold To Another Lender
While you may want not want your student loan sold to another lender, theres nothing you can do to prevent it.
Borrowers have no say in whether their loans are sold to another lender or whether the servicer can be changed, said Kantrowitz. This is disclosed in the loan promissory note signed by the borrower. If the borrower doesnt like the new servicer, the only options are to refinance with another lender or pay off the debt in full.
While you cant control whether or not your debt is sold to other student loan companies, you can be proactive about your student loan repayment:
- Stay in touch with your loan servicer.
- Open all snail mail.
- Thoroughly read emails.
- Make sure your contact information and address are up to date.
Doing these things can help you avoid making the situation worse and help you avoid any extra fees.
Was your student loan already sold to another servicer? Take these steps to ensure the transition goes smoothly.
Rebecca Safier contributed to this report.
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Public Service Loan Forgiveness Program Could Clear Debt For Thousands Of Americans
Cody Hounanian, the executive director of the Student Debt Crisis Center, a nonprofit organization that advocates for student borrowers, said the sudden notices of discharged debts are a blessing for many applicants who dutifully made the required 120 monthly payments or were on course to and yet were denied because they were inadvertently enrolled in the wrong payment plan or had the wrong type of loan or due to another technicality.
“It’s very emotional,” Hounanian said of the wave of financial assistance. “It’s changing their lives for the better.”
Student borrowers who have benefited in recent days are sharing their shock on social media.
But the latest reversal is also a “double-edged sword” for many borrowers, Hounanian said.
Those hoping to qualify will have until Oct. 31 to submit an application form under a limited-time waiver. Potentially 550,000 borrowers stand to benefit, the federal government said. In addition, student borrowers who may previously have been disqualified because they had a loan through Federal Family Education Loans, a program that ended in 2010, are now eligible. The catch is they will have to make sure such loans are consolidated into a new, federal direct loan.
“Unfortunately, there are some folks who with this news that debt relief is attainable may find the process confusing,” Hounanian said.
But the federal government said it is trying to simplify the steps, with about 22,000 borrowers initially having their debts automatically canceled.
Can I Get A Mortgage With Student Loan Debt
Want to get a mortgage and buy a house, but you’re buried under student debt? Here’s what you need to know.
For decades, the traditional path to homeownership has gone something like this: graduate from school, pay off your debt, start an emergency fund, begin saving for retirement, save for a down payment, and then buy a house. On top of that, never spend more than 35% of your net income on housing.
But the last twenty years or so have caused most Canadians to rewrite that script, putting buying a house ahead of debt freedom or even retirement. In particular, since the global pandemic began, the government eliminated the interest on federal student loans , and so there has been even less incentive to pay down low-interest debt. As a result, many Canadians have shifted their focus from debt freedom to trying to get into the hot housing market.
But what happens to their student debt? Can you apply for a mortgage if you have student debt? Does it impact your mortgage approval? The short answer is yes, you can get a mortgage with student debt, but it does affect your mortgage approval.
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Student Loans Add To Your Debt
Lenders use the debt-to-income ratio to determine your eligibility. DTI includes all of your monthly debt payments divided by your monthly gross income.
Most mortgage lenders require your total DTI ratio, including your prospective mortgage payment, to be 43 percent or less, though its possible to find lenders that will accept a higher DTI. Having a high student loan payment, in addition to your other monthly bills, could push your DTI past the required threshold and make it harder to qualify.
Student Loan Payments Hurt Your Ability To Build Savings
Buying a house requires an upfront down payment, usually totaling multiple thousands of dollars. Borrowers with student loan payments may find it difficult to save for a down payment on top of their monthly student loan bills, which can easily delay their ability to buy a house.
For example, having a student loan payment of $400 per month means you are missing out on $4,800 in potential savings for a home each year.
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Student Loan Forgiveness Programs
Student loan forgiveness programs are typically dependent on service in a particular occupation, like a job in the nonprofit sector or a qualified public service position. The following programs require some time commitment before your debt is discharged, but you could see your debt forgiven after five to 25 years.
What Are Common Student Loan Forgiveness Scams
There are fraudulent companies that claim that they can help you apply for loan forgiveness or cancellation if you pay them a one-time or ongoing fee. If you are contacted by a company saying that you’re eligible for loan forgiveness and promising to help you apply, this is likely a scam. They will take their fee but not offer any loan forgiveness.
Some companies may even pretend that you can’t receive loan forgiveness unless you use their services. This is another false claim. While loan forgiveness programs can be complicated, borrowers are able to file for loan forgiveness themselves without third-party intervention. When in doubt, contact your loan servicer directly to see which programs you may be eligible for.
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Student Loan Payment History Factors Into Your Credit Score
Payment history is the most crucial factor in your , accounting for 35 percent of the total score. Borrowers with an on-time track record will see their score increase, while those who have made late payments on their student loans will see a reduced score. Consumers who have loans in default will also see a dip in their score.
Mortgage lenders heavily weigh your credit score when determining your approval chances and your interest rate. If youve had trouble paying your student loans on time, your chances at qualifying for a mortgage could be hurt.
The good news for borrowers? Credit bureaus generally give more weight to recent mistakes over past ones, meaning any mistakes you made at the beginning of your student loan repayment journey will have less significance over time.
Student Loans And Mortgage Approval
Student loans are the biggest debt many firsttime home buyers carry. They can have an outsized impact on your mortgage budget compared to other forms of borrowing like credit cards.
But how do you actually crunch the numbers and figure out whether you can afford to buy a home?
The first step is to determine your debttoincome ratio, factoring in student loans and any other debts you pay monthtomonth.
The basic DTI calculation is simple:
/Monthly Pre-tax Income = Your DTI
For example, say your gross monthly income is $5,000. Each month, you pay $300 toward student loans, $250 on a car loan, and $200 on credit card minimum payments.
That means youre spending a total of $750 or 15% of your income on monthly debts.
Lenders typically want to see a DTI of 43% or lower when your housing costs are added to your existing debts.
Heres how a 43% DTI works out with a $5,000 monthly income.
- Maximum DTI: 43%
- 0.43 x $5,000 = $2,150
So $2,150 is the most you can spend on monthly debts including housing. You can work backwards from this number to estimate your maximum mortgage payment.
- Maximum debt payment: $2,150
- Maximum mortgage payment: $1,400
Now you know you can likely spend up to $1,400 each month on your mortgage.
Next you can use a home affordability calculator, plug this number in, and find out how much house you might be able to afford.
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Total And Permanent Disability Discharge
If you’re totally and permanently disabled, you may be able to qualify for federal student loan relief on the basis of your disability. Applicants need to complete and submit a TPD discharge application, along with any required documentation, and send it to disability discharge servicer Nelnet. When you apply, you’ll likely need to provide documentation from a physician, the Social Security Administration or the U.S. Department of Veterans Affairs.
You can also be released from any TEACH grant obligations if you meet one of the above requirements. For more information on how to contact Nelnet and apply for a TPD discharge, visit the Federal Student Aid’s TPD information resource center.
The Government Has Started Cracking Down On Risky Student
PayPal and Afterpay are most commonly known for ecommerce sales, but they also offer a service that schools can use to set up BNPL loans for students.
As the SBPC highlighted, the risks with BNPL can be dire. Not only are those lenders not required to offer an account statement disclosing payments, which can make borrowers confused about what they owe, but late fees can be as high as $25 for one late payment. Afterpay reported it sourced 20% of its overall yearly revenue from late fees alone, per the National Consumer Law Center.
Lawmakers are aware of these risks, and six Democratic senators urged the CFPB to increase oversight and ensure transparency over BNPL products in December.
” are not generally subject to federal supervision that can spot unfair, deceptive, or abusive practices or other violations of federal consumer protection laws,” the lawmakers’ letter said. “Consumers may be unaware of these regulatory gaps and may be erroneously led to believe that credit obtained from a BNPL provider comes with protections that are similar to those for credit cards.”
On Wednesday, the CFPB a blog post reminding colleges that advertise private student loans that they must disclose all costs and risks associated with the financing, as required by the Higher Education Act.
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