When Kristin and Sean Couch were ready to buy their first home, they feared that one thing would hold them back: Kristin's student loans. Her broadcast journalism master's degree from Syracuse University had left her more than $80,000 in debt.
The Couches are part of a generation that's delaying major life decisions, like whether to buy a home, because of student loan debt. More than half of student loan borrowers say their debt affects their ability or decision to become a homeowner, according to a 2015 survey of 1,934 student loan borrowers by American Student Assistance, a Boston-based nonprofit.
But becoming a homeowner is possible even if you have student loans. The Couches bought their 2,900-square-foot Craftsman home in Gainesville, Georgia, last spring. Here's how you can do it, too.
Shop for a home you can afford
Home shopping can be tempting. Three-car garages! Granite countertops! Stainless-steel appliances! Before you get carried away,
. If you're a first-time homebuyer, you may have to settle for a starter home instead of your dream abode.
But there are good reasons to buy a home sooner rather than later, namely tax incentives and the opportunity to build equity, says Brian Koss, executive vice president of Mortgage Network, a Massachusetts-based independent lender.
Minimize debt from credit cards and car loans
When lenders evaluate you for a mortgage, they typically look at four things:
- Your income.
- Your savings.
- Your credit score.
- Your monthly debt-to-income ratio.
Your debt-to-income ratio shows the lender your total financial obligations -- including car payments, credit card debt and student loans -- compared with your income. Lenders are looking for borrowers with a debt-to-income ratio of 36% or less, including the monthly mortgage payment. To keep yours low, pay off as much debt as possible before applying for a mortgage.
The Couches focused on paying off Sean's truck and their credit cards, which they'd relied on when Kristin was "making less than peanuts" in her first few jobs. When they got their mortgage, their only remaining debt was from Kristin's student loans.
Lower your monthly student loan payments
Even without other types of debt, having a lot of student loans could give you a high debt-to-income ratio. To lower that ratio and show your mortgage lender you have enough extra cash to make your monthly mortgage payments, consider
or switching to an
to lower your monthly student loan payment.
There are tradeoffs involved with both refinancing and income-driven repayment plans. When you refinance federal student loans, they become private loans and you lose federal protections, including access to income-driven plans and federal forgiveness programs. Income-driven plans, which cap your monthly payment at a percentage of your income, increase the amount of interest you'll pay over time because they extend your term length.
Most mortgage lenders won't mind if your overall student loan debt will increase; they're primarily concerned with your monthly payment, says Kevin Hanson, director of lending at Gate City Bank in Fargo, North Dakota. But you'll save the most money on your student loans if you minimize the amount of interest you'll pay over the life of the loan.
Make your student loan payments on time
When mortgage lenders look at your credit history, they'll want to see that you've paid off other debts on time, including your student loans, car payments and credit cards. If you've proved you can handle debt responsibly and you have a good credit score to show for it, mortgage lenders will be more likely to approve you -- even if you still have outstanding student loans.
"A student loan is never negative," Koss says. "It's just a question of whether you pay it on time."
Save for a down payment and closing costs
Buying a home doesn't just involve taking on a mortgage -- you'll also have to pay upfront for closing costs and the down payment. Closing-related costs include the home inspection, mortgage loan origination fee, mortgage insurance, homeowners insurance premium and title fees. In total, closing fees cost the average homebuyer about 2% to 5% of the home's price,
.
A traditional down payment is 20% of the cost of the home, but there are other options for borrowers today, such as putting less down and paying for private mortgage insurance each month until you build 20% equity in your home (though the less you put down, the more you'll pay in interest).
Despite Kristin's student loans, the Couches were able to buy their home with just 3% down through a local bank. But that doesn't mean her student loan payment isn't still a burden. "It's as much as a second mortgage," she says.
Still, to her, owning a home is worth the extra responsibility. "It's yours," she says. "You bought it. It's something tangible that you can see."
Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: teddy@nerdwallet.com. Twitter: @teddynykiel.
This article was written by NerdWallet and was originally published by USA Today.
Support HuffPost
Our 2024 Coverage Needs You
Your Loyalty Means The World To Us
At HuffPost, we believe that everyone needs high-quality journalism, but we understand that not everyone can afford to pay for expensive news subscriptions. That is why we are committed to providing deeply reported, carefully fact-checked news that is freely accessible to everyone.
Whether you come to HuffPost for updates on the 2024 presidential race, hard-hitting investigations into critical issues facing our country today, or trending stories that make you laugh, we appreciate you. The truth is, news costs money to produce, and we are proud that we have never put our stories behind an expensive paywall.
Would you join us to help keep our stories free for all? Your contribution of as little as $2 will go a long way.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. Would you consider becoming a regular HuffPost contributor?
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. If circumstances have changed since you last contributed, we hope you’ll consider contributing to HuffPost once more.
Already contributed? Log in to hide these messages.
