Individuals have earned their degree, got their first job, and are now ready to purchase their first house. But there is one major problem: They are saddled with thousands of dollars in student loans (SLs). Will any financial institutions such as traditional banks, credit unions, or lending firms approve them for a housing loan when they face that much student debt?
The answer is a resounding yes. Suppose they can prove to financial institutions that they are financially stable enough to pay for both their student and housing loans, as well as other debt payments. Housing debenture lending firms do not treat SL debts differently from those with other debentures.
In general, lending firms want the person’s total monthly debts like SL payments, as well as their estimated monthly housing debenture amortizations, to equal more than forty-three percent of their gross monthly income or the person’s income before taxes were taken out.
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People need to fall in line with these guidelines. There is no other formula. After what happened with the 2008 great recession, the world of no-documents and state income debentures are a thing of the past. Individuals now need to prove their debts and income if they want to get approved for a housing debenture.
A heavy responsibility
Lending firms might not view SL debts as being any different than a credit card or auto debenture debt. But this kind of debenture is certainly causing financial issues for students. According to experts, the average undergrads in 2015 will leave their schools with more than $30,000 worth of SLs. That is, the higher the figure has ever been. Most grads are leaving schools with more than $30,000 to pay back.
Big SL bills coupled with entry-level jobs might leave some fresh grads with DTI (Debt-to-Income) ratios that are out of this world. These individuals might face debt levels that consume more than 43% of their monthly income before taxes. Most financial institutions will not provide these individuals with housing loan funds. And if by chance they do, these firms will certainly charge borrowers with high-interest rates (IR).
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Tilting balances
The obvious way for individuals to fix a DTI ratio is to minimize their debt levels, increase their monthly income, or both. Let us say the total monthly debt of the student, including their SL payments, is $2,500, and their gross monthly income is $5,000, their DTI ratio is 50%. Lending firms would consider that pretty high.
But say individuals manage to minimize their total debt to $2,000 – maybe by paying some of their credit card debts or selling their automobile and purchasing a used one that does not need a car debenture – their DTI ratio will drop to at least 40%. It will be much better in the eyes of financial institutions.
There is a good chance that it is not possible for some fresh grads to pay their debts or boost their gross monthly income enough to improve their DTI ratios. However, they could minimize their debt level by choosing less expensive houses that come with smaller price tags and lower monthly amortizations.
It can immediately lower their DTI ratio and their debt level. Sometimes, individuals need to be very patient. They need to take the time to pay some of their SL debentures. Or they need to purchase a less expensive property. These individuals might not be able to get their dream home off the bat.
Will consolidating loans help?
According to financial professionals, college grads can consolidate their SLs. They might be paying as many as six SLs at one time. By consolidating these loans into a single debenture, they might be able to get a lower overall IR on their SLs.
Lower IRs will result in lower amortization. It could lower the person’s DTI ratio enough to make a housing loan possible. It should be the first thing people need to do after graduating. They need to start looking for loan consolidation with the lowest possible IR they can find.
Check out multiple financial institutions for that lower IR. It could make a huge difference, especially for individuals who just graduated. Fresh grads should also come up with a considerable amount of money for down payments as possible. Let us say a couple of fresh grads want to purchase a house that costs around $300,000.
A DP of 20% would cost them $60,000. If they can find funds for that DP, they can reduce their housing loan to $240,000. A home debenture of that size would come with lower monthly amortization compared to what they will pay with a $300,000 property.
The amortization might even be low enough to leave them with a good DTI ratio, even if they are paying thousands of dollars in SL debentures. Saving a lot of money is not easy, but it is also not impossible, as long as they are willing to wait before purchasing their first house after leaving school.
Fresh grads might have to wait more or less three years. They are much better off purchasing a house with a more significant DP. Their monthly amortization will be a lot lower compared to if they went with a 3% DP to get a government-insured home loan.
Pay bill balance
The last step is to pay bill balances like SL loans. If students do this, and if they keep the balances on their credit cards, they will end up with a good and stable credit score. Paying bills is very important. The better your score, the lower your IR on a housing loan; when the IR is lower, so is the monthly amortization.
The lower monthly housing loan amortization might leave individuals with a more substantial DTI ratio if their credit score is high. People need to be financially stable and responsible if they want to purchase a property, whether they have an SL or not. If they keep their credit scores pretty high, they will give themselves more chances to qualify for a housing debenture even if they do have a student loan under their name.
