A Two-pronged Approach to Balancing Student Loan Debt with a Mortgage

Two of the largest expenses you will encounter are higher education tuition and home ownership. Juggling both can be a budgetary strain, but it is possible to do just that. This is good news, considering over 60% of college graduates have student loan debt, and the average debt runs between $20-$30K.

Where to start? With your debt level and credit score.

Lower your debt-to-income ratio

Your debt-to-income ratio (DTI) compares your monthly amount of debt to your pretax income. This includes:

Mortgage payment or rent
Credit card payments (minimum monthly)
Student loan payments (minimum monthly)
Car loan payments
Court-ordered payments, such as child support or alimony

It does not include such expenses as health insurance premiums, utilities, food, and entertainment.

An optimum DTI is 28% without a mortgage or rental payment or 36% including housing expenses. While you can secure a home loan with a DTI up to 50%, it’s best to hit the sweet 36% spot by:

Paying off high interest credit cards: use any extra money you have coming in – tax returns, holiday bonuses, gifts – to pay off, or at least down, balances. Even putting a small dent in your balance will help lower you DTI.
Refraining from adding further debt: now is not the time for big ticket purchases, like furniture or travel.
Increasing your income: seek higher paying positions, ask for a raise, get a second job, do some freelance work on the side.
Reducing student loan debt: student loan debt is often a composite of multiple smaller loans. Pay off one or two of the smaller loans or those with the highest interest rates.
Refinancing student loans: refinancing a house is common knowledge, but you can also refinance your student loans for a lower monthly payment. Keep in mind that this will add to your line of credit, which lowers your credit score. So give yourself plenty of time, between six months to a year, to raise your credit score before you apply for a mortgage.
Enrolling in an income-based repayment plan: link your student loan repayment amount to your salary. As your earnings rise, the amount funneled to student loan payments keeps pace. This is about 10-15% of your monthly income.

Raise your credit score

Credit score is the flipside of your DTI where low is the way to go. You want the highest number possible for a credit score, and there are several steps you can take to achieve this goal:

Consistently pay your bills on time: late payments or a single missed payment will ding your credit score. So set up automatic payments if you think you’re likely to forget to pay a bill on time.
Don’t max out your credit: Just because you have a $10,000 line of credit on your card doesn’t mean you should rack up $10,000 worth of purchases. Live within your means now so you can afford a home in the future.
Protect your credit history length: Longevity is rewarded (as long as it is good credit history). Even if you don’t carry a balance on your credit cards, leave them open.
But don’t apply for new lines of credit: you’ll be tempted to use new credit cards and financing large purchases will add to your DTI and lower your credit score.

Congratulations! You’re now ready to explore your mortgage options

You’ve lowered your DTI and raised your credit score. Now it’s time to find a mortgage. There are many different loans other than the traditional 20% down variety. VA, FHA, first-time buyers – options abound! Many states even have first time-home buyer programs to assist with down payments or low down payment loan options. The professionals at Aksarben Mortgage will help you find a mortgage that will accommodate your student loan debt so you can Experience Your Good Life, sooner rather than later.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.