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If you’ve got the itch to ditch rental life, but are still paying off your student loans, the road to homeownership often seems impossible. Can you even buy a house with student loan debt? The short answer is yes, but there’s a little more to it than that. Let’s take a look.
How student loans can hold buyers back
Let’s start with the not-so-good news. It’s not always possible to purchase a home with existing student loan debt, as it depends on multiple factors. If you have a high debt-to-income ratio, meaning that a significant portion of your monthly income is going towards paying monthly debts, this can negatively affect your ability to secure financing. Having a high debt-to-income ratio also affects would-be homebuyers’ ability to save for a down payment. But, all is not lost.
Pay down debts
If your student loans are affecting your debt-to-income ratio, you need to spend a bit more time paying down those balances. Or, if you have other debt, such as credit card balances or car loans, focus on paying them down or off entirely and then revisit your homebuying plans. Try to get your debt-to-income ratio down to under a third of your monthly income, and ideally less than a quarter.
Increase your income
Consider getting a second job to boost your monthly income. One of the best ideas to save up for your first home is to take advantage of the gig economy. We’re lucky to be living in a time when the gig economy is hot! If you live in a metro area, your options for gigs are limitless, from meal delivery to grocery shopping for others, you can pick when and how long you work. Even if your debt-to-income ratio is low, working a few additional hours each week can get you to your downpayment goal faster than you’d initially planned.
Refinance your student loans
If you’ve not already, you can take a look at refinancing your student loans, especially if the interest rate is lower than when you initially took them out. And while the interest rate may not be much lower, refinancing your student loans can get you into your own home quicker by reducing your monthly payments. Once you’ve purchased your home, you can pay more on your student loans. Don’t forget, if you’re in Canada and you’ve got some student loan debt, you might consider looking at refinancing your student loans with a personal loan. Mogo is always a good option, or you can can check out a loan aggregator like smarter.loans.
Increase your credit score
Work on building your credit score so you’re a shining star on paper when you approach lenders for a mortgage. You may not realize it, but those revolving student loan payments are actually helping your credit (as long as you’re paying on time). Car loans, credit card payments, and student loans help first-time homebuyers build enough credit to finance their purchase. If your credit score is low because you’ve not been diligent about paying your monthly debts, focus on getting up to date and paying off bills to shape up your credit report.
Once you’ve gotten your debt down and your credit score up, focus on saving money to line the coffers. Saving for your downpayment is only one piece of the homebuying equation, as you’ll have closing costs to cover and money tucked away for any surprises as a first-time homebuyer. Expensive problems tend to arise right after you purchase your home, such as an emergency vet bill or your car’s engine deciding to die. Expect the unexpected, save accordingly, and you’ll be in good shape when you buy your house.