Life for millennials can be very difficult. It is even more difficult when they have thousands and thousands of dollars of student debt to their names. Recent statistics show that about 61% of graduated millennials don’t own homes yet. According to Bankrate, 43% of college graduates have student debt. These former students owe about $20,000 to $25,000 each, on average!
Being in so much debt makes it difficult for young people to save as much money as they would like to. Further, debt can really damage a person’s credit score and heavily impact their debt-to-income ratio. This inability to save makes it very difficult for college graduates to make a down payment on a house. Here are some things that hopeful home buyers need to keep in mind as they house hunt.
Understanding the Debt-to-Income Ratio
Despite what many people think, buying a house involves a lot more than just a good credit score. A good credit score is still a great thing to have, but we’ll get to that later. Right now we need to talk about the thing that no one really talks about, and that is your debt-to-income ratio, otherwise known as you DTI. This is essentially a comparison of how much debt you owe to how much money you actually make. This is important because banks need to know how much you owe and how much you need to pay every month to get in less debt. They need to know that your debt isn’t taking up too much of your money. Mortgage loan providers need to make sure that you have enough money every month to pay your mortgage while also staying on track with your other bills and debts.
For most mortgage loans, you cannot have a debt-to-income ratio of more than 28% on the frontend of things. On the backend of things (this includes your estimated mortgage and housing expenses), 36% is the maximum that you are able to have.
If there is any way that you can decrease your debt-to-income ratio, do it. Try to increase your payments to get rid of as much of your debt as possible. It is also really helpful if you can increase your annual income. You can achieve this by freelancing during your off-time or even by asking for a raise at work if you are in such a position to do so.
Any small reduction that you can make in your debt balance can be really helpful. Every little bit counts. Refinancing or consolidating your student loans is another great option.
It goes without saying but getting out of debt as soon as you possibly can is your smartest move. The sooner that ratio is balanced out, the sooner you can get approved for a mortgage loan, and the sooner you can get out of debt, which is always a win. This can also impact your interest rate. Having a lower debt-to-income ratio can get you a lower interest rate and save you more money over time. It’s also good to make note of the fact that if you pay off your student loans faster, you won’t pay as much interest over time.
The Truth About Credit Scores
As we mentioned earlier, your credit score isn’t all you need to think about, but it’s still pretty important. Your credit score tells lenders whether you’d be trustworthy or risky as a borrower. You are asking to borrow enough money to purchase an entire house after all, and that is no small purchase. The higher (and better) your credit score is, the easier the process of buying a house will be. You are more likely to be approved for a mortgage loan and have a lower interest rate on said loan.
You can lower your credit by paying all of your bills on time because payment history accounts for 35% of your credit score. Pay off your debts as soon as you possibly can. Also, don’t apply for a new loan or open up any new credit cards while you try to build up your credit score to get a house. Try your best not to raise your credit utilization rate! The less credit you use, the better.
We’ll Help You on the Path Towards Becoming a Homeowner
There is a lot that you need to prepare for financially when trying to get yourself a house. Unfortunately, because of increasing student loan debt, this process will only get more difficult over time. We highly encourage you to start preparing as soon as you can if homeownership is something that you see in your future.
The sooner you start improving your credit score and your DTI, the better your chances of owning a home in the future are. We understand how difficult this process can be when you have so much student debt, which is why we are here to help. Don’t hesitate to contact Cornerstone Realty if you have any questions about owning a home with student debt. We are here to help you towards that next big step in life.