Texas State Affordable Housing Corporation

Top 3 Tips for Buying a House with Student Loan Debt

March 6, 2020 | by Anna Orendain

A recent Bankrate.com survey shows that, even as millennials grow older, 61% of them still don’t own a home. And nearly 25% of them state that the reason is their student loan debt. 

This debt makes it harder for millennials to save for a down payment on a home, and it creates a higher debt-to-income (DTI) ratio for the potential home buyers.

DTI is the ratio that lenders use to measure a borrower’s ability to successfully make monthly payments toward their debts. 

If you are trying to purchase a home while experiencing student loan debt, here's some steps you can take to help make your dreams of homeownership a reality:

1. Improve Your DTI Ratio

DTI is an important factor for lenders when deciding whether or not to approve your application for a loan. Here’s a few steps you could take to lower your DTI ratio:

  • Pay down current debts — Do it as often and as much as possible! Not only will your DTI improve, but you’ll be closer to being debt-free.
  • Refinance your student loans — This could also lower your monthly payments at the same time.
  • Enroll in an income-based repayment plan — This will make sure that your monthly payments are aligned with your income level, allowing you to pay less each month.

2. Increase Your Credit Score

A higher credit score leads to an easier mortgage approval process and a lower interest rate on your loan. Here are some tips on how to raise your credit score:

  • Lower your credit utilization rate — This rate measures the amount of your total available credit you’re using. The less of your credit that you’re using, the better.

  • Pay your bills on time — Set up autopay if you have to!
  • Avoid opening new lines of credit (especially when about to buy a home) — These require hard inquiries on your credit, which can negatively impact your score.
  • Keep credit accounts open — Even if you’ve fully paid off an account, the longer that line of credit stays open, the more positively it affects your credit score!
  • Check your credit regularly — This will make sure you can catch any inaccuracies (which you can report to credit bureaus) and let you track your efforts as you improve your credit.

To find out more on where to safely get your credit report, click here.

3. Consider Down Payment Assistance and First-Time Home Buyer Programs

Saving up for a down payment is one of the biggest hurdles to buying a home. Here are some programs that help with both the down payment and closing costs on a home:

Other Steps You Can Take

  • Get pre-approved before house hunting —Getting pre-approved for a mortgage will help you know the loan amount you’d qualify for and help you find a dream home within budget.
  • Find someone to co-borrow or co-sign your mortgage — Having another person’s income and credit history factor into your mortgage application could potentially help boost your loan balance and lower your interest rate. Your co-borrowers get ownership rights, but co-signers typically do not and are only there to guarantee that loan payments are made on-time. 

If you’d like to start the process of buying a home, we recommend visiting our “10 Steps to Homeownership” guide, which gives you a bird’s-eye view of the homebuying process.

On the House blog posts are meant to provide general information on various housing-related issues, research and programs. We are not liable for any errors or inaccuracies in the information provided by blog sources. Furthermore, this blog is not legal advice and should not be used as a substitute for legal advice from a licensed professional attorney.

Comments

Uloho Bright

This post contains a lot of details and I really want to thank You for sharing it as it has been very helpful.

[email protected]

Hi Kenetha, we’d like to recommend the financial and credit services available through Texas Financial Toolbox, an online tool that allows you to connect with local nonprofits that can work with you more closely to achieve your financial goals. You can find that locator tool here: https://www.texasfinancialtoolbox.com/financial-education-credit-counseling

Kenetha Jones

I am really having a rough time with purchasing a home. It’s so stressful. I have done everything in my power to become a home owner. I’ve been at this since 2019. Back then I didn’t have the funds. Then I started to save and payed off two debts and got one taken off. Those wonderful student loans just keep holding me back and unless I hit the lottery there’s just no way to pay them off soon. I am a state govt worker and on thw IBR plan for loan forgiveness that will forgive the remainder of my loans if I pay them off for 10 years. I don’t have 10 years to wait to purchase a home. Within the next couple of years regular rent will start to be 2,000 per month and it will start to get harder to purchase a home. I went through the city but I’d you don’t find a home within a certain.perios you start over. Then they don’t get back with you no matter how many emails you send which keeps delaying your process. I went through the neighborhood Assistance Corporation of America aka NACA which guarantees you low payments and low interest rates. They didn’t work and I turned in everything remotely possible. I became qualified and made it to thw home search stage Aug of 2020. No change…I have yet to even put in my first offer. Their at a freeze. Someone please tell me that there is something or someone out there that can help when everyone is saying no. I’m being told everytime 1% of my 78,000 in student loans has to be counted. What do I do. Any ideas? Doesn’t matter if your on a payment plan they still count it. I don’t think I will ever become a homeowner! I

emily bennette

This is some really good information about buying a house. I would like to get one this summer. Thanks for pointing out that I need to get pre-approved for a loan. It is nice to know that it would be smart to get a professional to help me find a good home loan.

Penelope Smith

Thanks for explaining that there are programs that can help me make down payments. It does seem like a good thing to get an expert to help me with finding good programs and mortgages to use when buying my first house. I would like to get a nice house that doesn’t have a lot of projects that need to be done to it and one that is in a good location.

[email protected]

Hi Taylor, understanding credit is an important part of the home buying process! We’d recommend checking out our On The House podcast, which walks you through the steps of buying a home. The episode discussing the importance of understanding your credit can be found here: https://www.tsahc.org/blog/post/podcast-episode-3-understanding-the-importance-of-credit

Taylor Hansen

It really helped when you said to keep credit accounts open to raise your credit score. My wife and I want to buy our first home later this year and I’m worried about getting a certain home loan since I don’t know my credit score. Would it be better to check my credit score first or look for loan programs that could benefit our chances?

Colorado va mortgage lenders

Debt consolidation that will help the credit score is another great reason for cash-out refinancing. The homeowner can use the money from a cash-out refinance to pay off other bills such as credit cards.

Zoe Campos

Thank you for reminding me that I have to check my credit score often in order to see if I can make some improvements or find ways on how I can build it. I’m still trying to settle my student loan, but I also want to start having my own place where I can settle permanently. It might be a good idea to consult hard money lenders and see if this option can be beneficial to my current situation.

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