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Can I Buy a House if I Have Student Loan Debt

Posted on June 12th, 2019 at 10:43 AM
Can I Buy a House if I Have Student Loan Debt

According to CollegeBoard, graduates between 2017-2018 left school with an average of $28,500 in loans.  Sounds staggering, right?  Well, if you're a glutton for punishment, you can drop by and watch the current student loan debt in the U.S. rise by about $3,000 a second.

But we're not here to be the bearer of bad news; we're here to help you figure out how to--and if you should--buy a home while saddled with student loans.  To do so, we outline a couple of helpful considerations, breakdown how to find front-end and back-end debt, and what you need to qualify for a mortgage, as well as discuss whether it's a good time to buy or rent.

Can You Afford a Monthly Mortgage?

If you just graduated, chances are good you're not going to put the traditional 20% down payment on a house unless you landed a killer job right out of the gate or have more than a decent head start on a hefty savings account.  But when it comes to being approved for a mortgage, banks are less concerned about your ability to make a 20% down payment than they are about your debt-to-income (DTI) ratio.  A DTI ratio is what proportion of your income goes toward paying off financial obligations, such as auto loan payments, credit card, and rent.

If you're curious about your DTI, you can use this basic formula:

Total monthly debt payments / gross monthly income

The lower your DTI, the higher your chances are of being approved for a mortgage.  While banks don't consider living expenses such as cable, groceries, and monthly utility bills, you should be cognizant of these expenses since they impact your overall bottom line.  However, if you're using credit cards to pay your bills, then living expense will affect your DTI and banks will be looking at this.

And, although this ratio doesn't directly impact your credit score, your debt utilization ratio can.  If you're unfamiliar, this proportion is based on your total available credit and how much you currently use each month.  So if you got a little carried away with credit cards in college, get yourself on a payment plan ASAP, or better yet if you can, pay off your cards outright (after all, the average credit card interest rate is currently 19.24%).

So you may be thinking to yourself:  I didn't see student loan debt in that list of financial obligations.  Good observation.  With a better understanding of DTI, let's discuss it in its two variations: front-end and back-end.  Here is where student loan debt comes into play.

Front-End Vs. Back-End DTI

The front-end ratio, sometimes referred to as the "housing ratio," is calculated by dividing your estimated-monthly mortgage payments by your gross-monthly income.  When banks calculate your projected mortgage rate, they include the monthly principal, interest, taxes, and insurance.  When talking to a mortgage specialist, her or she may refer to these components of your monthly payments by using the acronym "PITI" pronounced "pity" (somewhat appropriate, huh?).

To calculate your front-end, divide your PITI by your gross monthly income. For instance, the average household income in Erie is $41,170 according to PayScale.  A lender would then calculate this individual's monthly income by dividing it by 12, equaling $3,431 a month.  If the PITI adds up to $1,250 per month, the equation would be as follows:

1,250 / 3,431 = .36

In this example, the front-end DTI is 36%.  As a general rule of thumb, banks don't like ratios north of 28%.  While there are options for those with higher DTIs, they often come with less favorable terms, as the chances of the borrower defaulting on the loan is higher.

Like front-end DTI, back-end is a measure of your financial obligations in comparison to your gross monthly income.  However, back-end DTI includes a multitude of financial obligations, including PITI, credit card debt, and--drum roll, please--student loan debt.  Using the same figures as the example above, the nation's average monthly student loan payment of $393, and a modest credit card payment of $100 a month, here is how back-end DTI would be calculated:

(1,250 + 393 +100) / 3,431 = .51

In this example, the individual's back-end ratio is 51%.  By and large, banks like to see a back-end ratio at a maximum of 36%.  Therefore, this individual is going to have a hard time getting approved for a mortgage.

Should I Rent or Buy?

First things first:  do not settle for a house just because it's "cheap."  A rock-bottom price tag often comes with a mountain of headaches.

While buying a home is a smart investment, you need to decide if it's the right time to make the leap in home ownership.  If you calculate your front-end and back-end ratios and they're less than 28% and 36% respectively, then chances are good you're in healthy financial standing and should buy.

On the other hand, if you calculate your DTI and it's sky-high, consider renting for the time being.  This can give you a chance to adjust your DTI and bank some savings to put towards your home.  Maleno offers a wide variety of rentals that offer a suite of exceptional amenities and professional on-site management team.  Whether you are looking for an apartment or you're ready to buy, contact Maleno to learn more about our real estate services and what we can do for you.