Recently, the amount of Federal Student Loans outstanding in the United States topped $1 Trillion.
Many new graduates work to become established in their careers, but if they carry their student debt over a long period, they may wonder how these loans will affect their ability to purchase a home. If you’re concerned about how student loans will factor into your mortgage approval, here are a few questions to consider.
How does my student debt affect my credit score?
FICO score is an important factor used to determine a mortgage applicant’s credit worthiness. If your score is on the low end of the mortgage lender’s guidelines, and you’re currently carrying student debt, you may need to accelerate payments before applying for a mortgage. On the other hand, if your credit score is impacted by other items, such as high credit card balances or late payments of other bills, then, you’ll need to prioritize your payments and work toward overall credit repair.
How much is my total debt?
According to U. S. News & World Report, about 7 in 10 college students graduate with student debt. And of those with debt, the average graduate owes just over $28,000 in loans. These student loan balances will be added to the rest of your current debt to calculate an overall debt to income ratio. In most cases, to obtain a qualified mortgage your debt to income ratio needs to be below 43 percent. If student debt makes up the greatest portion of your overall debt and you want to bring the debt to income ratio down, then focus on paying off student loans. Also, note that when paying down debt, interest rate is another important consideration and you’ll want to pay off higher interest rate loans before lower interest rate ones.
How well do I handle my student debt?
Lenders also look at the increase in your debt burden with your possible mortgage payment. If you appear to be struggling to pay off minimum balances of credit cards, and student loans each month, then they may hesitate to grant you a new large loan. However, by paying off student loans on time each month, mortgage applicants can demonstrate their ability to handle the responsibility of debt payments.
Do I expect my future income to rise?
Many recent college graduates begin with entry-level jobs and build their careers from there. If you’re currently attending grad school or completing an internship, and expect your future income to rise, then this is something you should mention to your loan officer when applying for a mortgage. A knowledgeable mortgage lender can work with you to find a loan product that will best meet your current and future home buying needs.
A college education is expensive and student loans are common line items on many mortgage applications. If you have questions about how your student loans will affect your application, don’t hesitate to speak to a mortgage lender before you begin the home buying process.
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