What's the biggest barrier to purchasing a home? When applying for a mortgage, for hundreds of thousands of college graduates the biggest barrier — surprisingly — isn’t credit card debt. In fact, graduates are finding it is their student loans preventing them from pursuing that American Dream of homeownership. Here’s some student loan statistics you might wanna know:
- Over 43 million borrowers carry a collective federal student loan debt of $1.6 trillion 😱 — and about 92% of all outstanding student loans is federal debt
- 17% of borrowers owe $100,000+ in student loans — that’s a HUGE amount of debt for someone to find themselves in
- While mortgage debt is the highest consumer debt category, student loan debt now follows in second place
- Over 70% of people believe their student loan debt has in fact impacted their ability to buy a house
Don’t fret — if you do have student debt, there are steps you can take to overcome this barrier to homeownership. Let’s discuss 4 big challenges, and their solutions:
1. DTI (Debt-To-Income Ratio)
One of the biggest barriers to acquiring a mortgage is the “DTI”, meaning the debt-to-income ratio. Mortgage lenders want to know that you’re not overextending yourself by borrowing more than you can afford, as it may impact your ability to pay them back.
The DTI is calculated by looking at your monthly income and the amount of recurring debt you have: the lower the percentage of debt compared to the income, the more favorable it’ll look to a mortgage lender. As a rule of thumb, 36% or lower is ideal.
A common myth is that the credit score is the most important part of being able to get a mortgage, or even how big your downpayment is, but most of the time the lender is more concerned with the debt ratio.
A study showed that 52% of of younger millennials don’t in fact qualify for a mortgage for a house due to low debt-to-income ratios (of which a large amount of debt is student loans).
The Solution ✍️
Control and reduce your ratio of debt to income… simple right?! You don’t need to go through this alone, however. A good place to start is contacting a trusted, local mortgage lender who can help you realize your ratio, which gives you a good starting point to reduce that debt.
The lender may be able to suggest which debt to start attacking first, with a list of priorities to help you make sense of it all. They also may be able to suggest a debt consolidation product which will lower your monthly minimum payment and interest rate, which will make that DTI look better.
Asking yourself which mortgage lender to use in South Jersey? Send us a text on 856-669-4560.
2. Credit Score
As mentioned above, while credit score isn’t often the biggest thing lenders look at, it is still important when applying for a mortgage. If you want to know the stats, just 8% of millennials are denied a mortgage because of low credit scores. But here is why it is important: your credit ranking will affect the mortgage interest rate you can access.
As a rule of thumb, the average FICO (the credit score that many lenders use to assess an applicant's credit risk) credit score is 700.
Anything above 750? Fantastic! Lenders typically assess this as an excellent credit score.
Below 649? Typically assessed as a poorer credit score.
The Solution ✍️
Time to focus on building up your credit score so you can secure a better interest rate. If you aim to always pay your debts on time, this will go a long way to boosting your credit score, as it helps reassure lenders you’re a dependable borrower. Skipping payments can really put a dent in your score, so do your best to always make the minimum payment on loans and your credit cards. Tip: Set up auto-pay on your loans and credit cards so the minimum payment is ALWAYS made.
Is your credit score is surprisingly low, despite you paying all your debts on time? It could be that you don’t have enough of a credit history or enough accounts. But if you want to get a mortgage in the next 6 months, you should speak to a mortgage lender before applying that that new credit card!
There also may be an error on your credit. You can also obtain a free credit report on a multitude of different sites, such as Credit Karma. Go through the report with a fine tooth comb and make sure everything is accurate — and you can appeal anything that isn’t.
3. Credit Utilization
Aside from your DTI and your credit score, lenders will also assess how much you make use of your available credit. Credit utilization is your monthly credit card spend, versus the percentage of your overall credit limit. Lenders typically want to see you use less than 30% of your available credit limit.
The Solution ✍️
Keep. It. Low. The ideal way to manage credit utilization is to use as little as possible. For example, if TD Bank gives you a $2,000 credit limit on your new credit card, aim to use less than $600 of that credit at any one time.
If you have a total of $20,000 credit limit across multiple credit accounts, keep your borrowing to less than $6,000. And if you go over this, aim to get it back under as soon as possible.
In an ideal world, you’ll keep your credit utilization to less than 10%.
Having trouble remembering not to spend too much on your cards? Most credit card accounts will allow you to set up automatic balance alerts, so you’ll receive a notification if your spend gets over a certain amount.
4. The Downpayment
Saving for a downpayment is a huge challenge whether you’re a student loan borrower or not, but with many ex-students repaying a huge chunk of loan debt every month, it’s understandable that they may have a harder time of saving.
Over 85% of people who don’t yet own a home say their inability to save for a downpayment is the biggest reason why they’ve had to delay buying a house, but here’s something you may not know... 👇
The Solution ✍️
First time buyers make a median downpayment of only 6% (even though 62% of Americans believe a 20% downpayment is necessary). So you might not need as much money upfront as you’d think!
There’s also many programs accessible to first time buyers that might help you out when buying a property. Federal programs, such as the FHA or USDA loans, allow you to purchase a home with as little as 3.5% down. There is also downpayment assistance available, so be sure to speak to a vetted, trusted lender who can point you in the right direction and check your eligibility.
What Can You Do?
While having student loan debt can throw up a lot of challenges in getting a mortgage, all hope is not lost as there are many solutions.
The biggest tool in your arsenal is having a savvy real estate agent and mortgage lender on your side to guide you through the process and make sure you’re aware of all options available to you, to set you up for success.