Student loan debt have you worried about applying for a mortgage? It isn’t the loan itself that can affect your mortgage qualifications, but the amount you owe on that loan compared to your income, as well as the amount of the mortgage itself. Here are some basic factors that your lender will consider.
If you’re now in the workforce and pulling in some decent cash every month, a lender may overlook your student loan debt, considering that your career will support a monthly mortgage payment in addition to student loan payments. These chances increase if you don’t have much additional debt. If you’ve been in your job for less than a year, you may want to wait a little longer to apply for the mortgage to show longevity.
The front-end ratio is sometimes known as the housing ratio. It helps estimate what your payments would be (including taxes, interest and insurance as well as your mortgage). Your lender will take this amount and divide it by your average monthly income to see what percentage of your income would be allocated to pay the monthly amount.
Remember that student loans, even those in deferment, will factor in as a percentage of your current debt. This will affect debt-to-income ratio, and if you have other debts you must pay monthly, the percentage may be too high and you may not qualify you for a mortgage. But there is another option to consider: back-end ratio.
With the back-end ratio, a potential lender looks at your monthly debt payments (such as student loans, auto debt, credit card, etc.) and compares it with your monthly income. It gets a little sticky here, because you may qualify for other types of loans but not a conventional home loan, depending on the amount of debt you have.
If you can pay off smaller credit card debts or choose a smaller budget to work with when applying for a mortgage, you can improve this score.
Timing Is Everything
Reputable lenders don’t want you to get in over your head when it comes to debt, and because you have student loans, one can assume you’re a smart cookie who knows that knowledge is power. The right home is out there waiting for you when the time is best for you. If not now, perhaps in a year or two, when you’ve had more time to increase your income and pay down that loan.
CTA: To get information related to your specific situation, please call Open Mortgage, LLC directly for a consultation or email us here.