Posts

Student Loan Debt and Buying a Home

/in /by

If you have a lot of student debt and you are trying to buy a home of your own, you may quickly realize that your student debt is an obstacle. Why do a lot of student loan debt and buying a home not play well together?

Student debt and back end Debt -to-Income Ratio (DTI): When applying for a mortgage loan, lenders will calculate your DTI. Basically they are comparing your income to your monthly debt payments. (Learn more about back end DTI here.) They want to know if you can afford the monthly payments on a home when considered with all of your other monthly debt payments. The more debt you have, the higher your DTI.

If your back end DTI exceeds the limit set by your lender (typically 43% or less) your mortgage application may be turned down. Even if you are approved for a mortgage, your DTI may still affect your ability to obtain down payment assistance. (HomeOwnership down payment assistance programs require a maximum back end DTI of 42%.)

How is your student loan debt calculated into your DTI? Lenders may use one of two different methods to determine your student loan payment on your DTI.

  • The 1% method: Some lenders simply determine 1% of your total student loan debt and use the resulting figure as your student loan’s contribution to your back end DTI. This method may work against you, especially if you are on an income based repayment program or have extended your student loan term beyond ten years.
  • The actual payment method: Using this method, the lender uses your actual monthly student loan payment as input to your back end DTI.

Which method will be used? That depends on a lot of factors. Are your loans in deferment? Are you on an income based repayment plan? What kind of mortgage will you have (FHA, VA, conventional, USDA, etc. Determining the method used can be complicated, so don’t be shy about asking lenders how they will consider your student loan payments when calculating your back end DTI.

None of this is to say that you can’t buy a home when you have student loan debt. People with student loans buy homes every day. However, having a lot of student debt can be a big road bump for may people on their road to homeownership.

 

 

First-Time Homebuyer Programs Work

/in /by

Have you been wondering if a first-time homebuyer education and coaching program is for you? A study reported by HUD could help you decide. The results of the study show that homebuyers who have completed a first-time homebuyer program are 1/3 less likely to fall 90 or more days behind on their mortgage than homebuyers that bought a home without homebuyer education and coaching. That is a huge difference and one that you should think about.

Still not convinced?

Another study reported by Freddie Mac found similar results with a 29% improvement in default rates over first-time buyers who did not complete a first-time education program. Additionally, the Freddie Mac study showed that there is a financial benefit to homebuyer education programs that averages $1,000 for the homebuyer. That is more than enough to cover the cost of the program. The bottom line is that First-Time Homebuyer programs work and they can save you a lot of money.

Want to learn more about Homeownership education and coaching in the greater Dayton area?

The HomeOwnership Center of Greater Dayton is a HUD approved non-profit agency that promotes sustainable homeownership. We provide classes on-line and in person. Call us at 937.853.1600 or learn more here: First-Time Homebuyer Program.