Today, it’s incredibly rare to graduate from college without at least some student loan debt. A few lucky people get away with owing just a few grand, while others find themselves saddled with six-digit debt. There are many contributing factors to our student loan crisis, but we’re not here to discuss rising tuition costs, the Great Recession, or millennial spending habits. Instead, we’re here to discuss whether people paying off their student loans should attempt to also buy a home.
A recent study found that college graduates who owe more than $25,000 in student loans are less likely to own a home than those who owe less. This isn’t surprising. Paying off your loans make it harder to save up for a home, since your extra money is going toward debt. If you dream of becoming a homeowner before you retire, you have options, even with your debt. Student loans don’t mean you can’t own a home. They just mean you have to take a hard look at your finances, be honest about your situation, and be willing to compromise.
Homeownership could be within your reach if the following three statements are true:
Your Debt-to-Income (DTI) ratio is low.
Your DTI is one of the most important factors a bank will consider when you’re applying for a mortgage, as this number helps them figure out your ability to pay off your new loan. DTI is determined by adding up your total monthly debt, including your projected mortgage payment, and dividing it by your total monthly income. The lower your ratio, the better chance you have of being approved for a mortgage. Obviously, a mountain of student loan debt will raise your DTI quite a bit. If this is the case for you, there are a few ways to lower your DTI, even if wiping out your student loan isn’t possible. You can focus on paying off your credit card, which usually has a higher interest rate anyway. You can also make bigger payments on your car, in order to get it down to ten payments or less—this will improve your DTI instantly. The other way to decrease your DTI is to increase your income. While this is easier said than done, it’s worth finding out if and when you’re due for a raise at work, applying for better opportunities in your field, or taking on side gig for a year or two. By working hard now, you can reap the benefits later.
You’re ready to settle down in one place.
In general, buying a home is a good investment if and only if you plan to live in it for at least two years—the longer, the better. This could become an issue for younger people who are still dealing with the burden of loans, since mobility—that is, the ability to move quickly and often—can be a boon when it comes to finding the right career or settling into the right relationship. When you’re young and figuring out your life, anchoring yourself with a home and a mortgage may not be the best idea. If, on the other hand, you feel settled in your job, your relationship, and your city, home ownership can be a way to put down deep roots and enjoy the benefits of belonging to and investing in your community.
You have enough money saved up for a down payment.
Once upon a time, 20% of the home’s listing price was the down payment most people expected to pay and saved up for. Now, thanks to the Federal Housing Administration, first time homebuyers can put down as little as 3.5%. For those with hefty student loan debt, it may be their only viable option. While this can lead to higher interest rates on the loan and a longer period of making payments, a smaller down payment isn’t necessarily negative. This is especially true when you consider that paying a mortgage for 30 years is often cheaper, overall, than paying rent for the same amount of time. Another way to make a smaller down payment is to look for a smaller, and thus cheaper, house. If you want to invest in a home now, for stability or equity, don’t think of it as your forever home; think of it as your starter home. A smaller house that doesn’t have all the bells and whistles will be cheaper than a sprawling home on a large property for you and the five kids you plan to have… in fifteen years. By living within your means and compromising on your dreams, you could open the door to options you hadn’t previously considered.
Ready to start shopping?
If you said yes to all three of the above statements, then it might be time to start your search for the perfect home. If you need assistance navigating this very important decision, contact Network Real Estate. Our agents can help you find a home that fits your lifestyle and your budget at every stage.