Student Loans vs. Homebuying

As the price of a college degree increases dramatically, so, too does student loan debt. Millions of American’s report that, even more than a decade post-grad, they are still stuck with thousands of dollars in student loan debt—and that’s the average.

However, there is no reason to let the burden of student loans impact your decision to buy a home. With the right financial planning, you can end up in the home you desire without having to sacrifice your monthly loan payment.

Credit score.

Your credit score is perhaps the most important piece of the puzzle in securing a mortgage loan for your new home. Lenders want to see that you are reliable in paying off your debts, and, while student loan payments (if you’re making them regularly and on time) should not affect your score too much, other payments can. Make sure you are on top of other monthly payments such as your car, insurance, and credit cards. Missing these payments or paying the minimum amount will negatively impact your score over time.

The down payment.

A stressful thought, for sure—the down payment on your home is probably a big point of concern if you have a lot of built up debt as it is. The secret is that the perceived “20 percent down requirement” is not actually a requirement at all, but a suggestion. You don’t want to jump head first into a down payment if you know you can’t afford it, but don’t assume you have to put the maximum amount down in order to secure your ideal home.

Debt-to-income ratio.

You may have heard this phrase before, or are at least experiencing the negative effects that student loans can have on this number. Either way, your debt-to-income ratio is the percentage of your income that is impacted by the amount of debt you carry. For some college grads, the ability to save even a little bit of money each month is impossible. But, like your credit score, your DTI is something banks will likely look at before offering a mortgage loan, so it’s important to keep this number in balance if you can.

Patience.

Whittling down student loan debt takes time for most people. It’s not uncommon to sit with this debt for upwards of fifteen to twenty years, so, above all, it’s important to be patient. If homeownership is your ultimate goal, be sure to give yourself a reasonable timeframe to get there so you don’t get overwhelmed and end up in an unfortunate financial position you can’t get out of.

The Language of Homebuying

Buying a home can be intimidating if you are not familiar with the most common phrases used throughout the process. But not to fear: here’s a list of home-buying lingo to bring you up to speed.

  • Fixed-Rate Mortgage
    Mortgage rates are discussed when you meet with a broker. A fixed-rate mortgage is a loan that has an interest rate which will remain the same for the life of the loan. The most popular is the 30-year loan because it usually makes your payments the lowest.
  • Adjustable-Rate Mortgage
    On the contrary, the interest rate on an adjustable-rate mortgage can change from year to year. You’ll want to discuss the pros and cons of both a fixed mortgage and an adjustable mortgage with your broker.
  • Private Mortgage Insurance (PMI)
    The good news is that you don’t need to put 20 percent down to purchase a home. However, if you choose to move forward with a Federal Housing Administration (FHA) loan, you’re required to purchase private mortgage insurance. PMI is a type of insurance that reimburses the lender if you default on the loan.
  • Escrow
    You’ll hear this term once you put an offer on a house. Escrow is defined as the holding of funds by a neutral third party prior to closing.
  • Contingency 
    “We will only move forward with the sale as long as x, y, and z happen.”
    A contingency can be placed by either the buyer or the seller. It’s a provision in the contract stating that some or all of the terms of the contract will be altered or voided by the occurrence of a specific event.
  • Closing Costs
    You’ve made it! It’s closing time. But with the closing comes costs. By definition, closing costs are all transaction charges that homebuyers or sellers need to pay at the close of escrow when the property is transferred. Typically, closings costs range from 2 to 5 percent of the purchase price.

Brushing up on the most common phrases will help to make the buying process go off without a hitch!