Just because you have a student loan doesn't mean you won't qualify for a mortgage. Consistently paying student loans on time will strengthen your score. On the flip side, a missed payment or letting your loans default will hurt it.
Like any other home buyer when deciding whether to approve your for a mortgage, lenders look at how much debt you already have compared with your pretax income.
Underwriters also look at credit score, unusual activity in your recent bank account transactions. Once all of your documentation is verified and the home appraises at the value necessary, your lender will give you a document called a Closing Disclosure, which includes the final terms of your loan and your closing costs. From here, all you need to do is acknowledge your disclosure, attend a closing meeting and sign on your loan.
How to prepare for your new home
Pay down your debts as much as possible. Use your tax refunds, holiday bonuses or any extra funds you have to make a dent. Even a small reduction in balances can help put the percentages in your favor.
Increase your income - Easier said than done depending how long you have been at your current company. You can ask for a raise or get a second job, side gig or freelance work can help supplement your income and improve your DTI.
Avoid new credit lines - Don’t apply for any new credit cards or loans as you prepare to buy a home. These require hard credit inquiries, which can have a negative impact on your score.
Keep paid-off accounts open - The length of your credit history matters, too, accounting for 15 percent of your score. Leaving long-standing accounts open (even once paid off) can help you in this department.
Consider down payment assistance
- A down payment grant/gift from family member
- Look into First time buyer options
- Find a Co-borrower
Should you pay down your student loan before buying your new home?
First, take a look at your DTI ratio. Lenders care less about the dollar amount of debt that you have and more about how that debt compares to your total income. You can still buy a home with student debt if you have a solid, reliable income and a handle on your payments.
The fastest way to lower your DTI ratio is to pay down some of your debt. Paying off debt eliminates a recurring expense and frees up more cash flow. Consider paying off another debt source if you can’t afford to make an extra payment on your student loans.
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