Buying a home is part of the American Dream, which is on most Americans’ bucket list. However, affording a down payment for your dream home can be a daunting task, especially with outstanding student loan debt. Statistics show that the median down payment for a first-time homebuyer was 6% of the home price in 2019. For customers with massive student loan debt, such a down payment could be unreachable. So, deciding whether to pay off your student loan or save for a down payment depends on several factors. There is no one-size-fits-all answer to it. There are certain instances, however, where it’s wise to prioritize one over the other. This article looks at both of these options.
How student loans affect getting a mortgage
Your student loan debts play a significant role in your debt-to-income ratio and payment history to be approved for a mortgage. To qualify for a conventional mortgage, one needs a credit score of around 620. Your payment history is also a crucial factor in determining your FICO score. So, having a history of missed or late student loan repayments will reduce your score, making it harder to get approved for a mortgage with reasonable rates, or one at all. On the flip side, timely and consistent payments reflect positively. The best mortgage terms and rates go to borrowers with higher credit scores.
Should you pay off your student loan before buying a house?
Let’s face it, buying a house is an expensive affair. It can seem wise to hold off on buying a home with a current student loan debt, and it can be even more challenging to save for a house with a high debt-to-income ratio. However, with enough income to take care of both payments, it could be wise to invest in your first home.
Signs you should pay off your student loan first.
When deciding whether to save for a house or pay for student loans, a few factors can help you decide on the best priority:
1. When your debt-to-income ratio is too high
If the income you bring in monthly is almost equal to the amount you pay in debts such as credit cards, student loans, and car loans, it is best to repay the debt before purchasing a house.
2. When you’ve defaulted on loans
Defaulting on student loans has several negative implications on your credit score, and this shows lenders that you’re a considerable risk to take on. Therefore, strive to improve your credit score before going for a mortgage.
3. When you’re struggling to make payments
If you’re struggling to make repayments on your loans monthly, it’s advisable to hold off on saving for a house.
4. When you don’t have an emergency fund or savings for a down payment
Before you start shopping for a mortgage, observe your savings. If you do not have enough for a down payment that is 5 to 10 percent of the sale price, or enough reserves for an emergency fund, it is best to hold off buying a house.
Signs you should buy a house.
Even with student loans, you may still be able to afford a home. Below are a few signs you’re ready to buy a home.
1. You can afford to make monthly payments on your loan on time
If your student loan payments are manageable and you can pay the loan on time every month, this is an excellent indication to apply for a mortgage.
2. You’ve saved for a down payment
If you have enough savings to cover a down payment on a home, this is a positive indicator that you’re ready to be a homeowner.
3. If you have enough income
If you have disposable income to cover home expenses and take care of the closing fees and costs, you’re ready to purchase a home.
If you have your finances in order and your credit is good, but you don’t have enough money for a substantial down payment, don‘t despair. There are many low, down payment options available. Mortgage Equity Partners work with many borrowers to get them into their dream home with sometimes a little as 3.5% of the home’s sales price as the down payment. If you are a Veteran or live in a rural area, there are options to put no money down. Finally, many state and local agencies offer down payment assistance programs. You need to work with an experienced and professional mortgage loan officer who can share the program specifics with you!