We’ve all seen the headlines — the average amount of student loan debt is ever increasing as more New Englanders look for financial help to pay for college educations. The most recent graduating class had an average of $28,650 in student loan debt nationally, while recent grads in Massachusetts and Rhode Island fared worse with average loan debts of $32,065 and $36,250, respectively.
No one who has student loans is alone — nearly 70 percent of college students graduating in 2018 have student loans.Once there is a signature on the dotted line, student loans stick around for years and years. This begs the question: Does the decision to take on student loan debt affect the ability to buy a home? While the answer varies from person to person, fear not. The oversimplified answer is yes, it is possible to purchase a home while holding student loan debt.
Can I Buy a Home If I Have Student Loans?
Every person’s financial situation and goals are different, meaning debt affects each person differently. Having a hefty loan payment on an early-career salary could impact the ability to save for required down payment amounts, or simply reduce the pace at which one is able to save. Tradition suggests aiming for a down payment of 20 percent of the sale price on the home. There are first-time homebuyer programs that may help you with a down payment or require smaller down payments (less than 20 percent).
For those not putting 20 percent down, private mortgage insurance (PMI) may be required, which is typically added to a mortgage payment. PMI premiums are added to monthly mortgage payments until the principal balance is paid down to a percentage of the appraised value of the home. This percentage is dependent on specific mortgage programs and it’s best to talk to a mortgage lender about PMI.
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Buying a home is a big decision and commitment, so there is a lot to consider. It is a good idea to factor in student loan payments when determining the feasibility of taking on a mortgage. Remember that home ownership is more than just making mortgage payments and paying property taxes. Your home will likely need maintenance at some point - are there resources to pay for emergency repairs to the roof or water heater?
Have an honest conversation with yourself, and your partner if you are planning to buy with one, about the state of your finances and comfortability with debt before applying for a mortgage.
How Do Student Loans Impact A Mortgage?
There are a few ways that student loans may impact a mortgage. First, having a bunch of student loan debt raises an individual’s debt-to-income ratio. Debt-to-income ratio compares the amount of debt, in student or car loans, credit cards, etc. a person is in to their pre-tax income. Mortgage lenders use debt-to-income ratio as a factor in determining if someone qualifies for a mortgage and what interest rate they secure.
There are a few ways to lower debt-to-income ratio. One is to increase the income side of the equation. While we would all love to wave a magic wand at work and get a raise, it’s usually not that simple. Increasing income may mean taking on a second job or turning to a side hustle.
Another way to lower debt-to-income ratio is to pay down loans and other debt as much as possible before applying for a mortgage. Talk to a mortgage broker about how debt-to-income ratio could affect your plans to apply for a mortgage and your options.
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Student loans may have a positive or negative impact on credit score, which is also vital in determining eligibility and the interest rate for a mortgage. Making payments consistently and on time can help improve credit score and establish credit history. On the other hand, missing payments or defaulted loans can damage credit score.
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Deciding to buy a home is a major life event. A good loan officer will take debt into consideration, but will also offer advice to help you reach your goals. No matter where you are in your life’s journey, our bankers here at Rockland Trust are here to help you navigate the financial aspect and reach your goals.
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