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How Student Loans Affect Your Home Buying Power

How Student Loans Affect Your Home Buying Power. 0

If you’re carrying student loan debt, you’re not alone. According to a recent article by Forbes, there are 44 million active student loan borrowers in the U.S., representing about 1.3 trillion in outstanding debt. About 29.4 million of these borrowers are Millennials.

As of 2016, the average college student carried $37,172 in student loan debt. Student loan obligations have now exceeded credit cards, car payments and consumer loans as the largest non-mortgage debt burden faced by Americans.

Having a student loan doesn’t automatically prevent you from becoming a homeowner. The real impact comes from the amount of your student loan debt and the size of your monthly payment. This factors into your debt-to-income ratio, (DTI) which is one of the areas lenders examine when you apply for a mortgage.

Your DTI is calculated in two ways. The “front-end” ratio measures monthly payments for housing-related expenses, like the mortgage principal and interest, plus property taxes, homeowner’s insurance, mortgage insurance and any HOA fees.

The “back-end” ratio includes all monthly debt payments, including the mortgage and housing-related payments, plus student loan payments, credit card payments, car payments and any other consumer loan. Alimony and child support payments are also included.

To determine your back-end DTI ratio, take your total monthly debt payment sum and divide it by your gross monthly income. If your total monthly debt payments, including your projected mortgage payment, run $2,000 per month, and your gross monthly income is $5,000, your DTI is $2,000 ÷ $5,000, or 40%.

Depending on the type of mortgage involved and its underwriting rules, the maximum allowed back-end DIT ratio ranges from 36% to 50%. With student loan payments alone averaging $351 for young adults, it’s easy to see why student loans can make obtaining a mortgage more difficult.

No matter the type of debt you have, the amount of your monthly debt obligations affects the mortgage payment you can afford – which in turn, dictates the mortgage amount you’ll be allowed. Your home buying power can be improved by paying down and/or paying off credit cards, car payments and installment loans.

Refinancing your student loans could also be considered, but refinancing Federal student loans means giving up some of their flexibilities. See considerations posted by the Consumer Financial Protection Bureau for more information.

Need guidance about mortgages? Your Exclusive Buyer Agent can refer you to local, trustworthy lenders who will discuss your mortgage options with you. And because your EBA provides you with fiduciary representation, he or she can also help you determine the best mortgage offer for your situation. Find an EBA in your area today!