How to Buy a House When You Have Debt

Most Americans need to borrow money to afford their college education to prepare for their future, but many don’t realize how damaging this can be when they go to buy a house with crippling student loan debt. Fortunately, it doesn’t make it impossible for you to buy a home. In our guide below, we will go through the process step-by-step on bypassing your student loan debt to choose the best mortgage rate for your new home.

Understand Your Current Financial Situation

Before we get too focused on purchasing a home with student loan debt, let’s take a quick step backwards to better understand your current financial situation. This way, you can better understand what kind of loan you need and what type of credit you’re working with.

Even though buying your new home is primarily a personal decision, it’s an even larger financial decision. It’s important that you’re comfortable adding even more debt on top of your student loans. Think about the consequences of additional debt, such as damaging your credit score even more and what kind of consequences that can result in.

Recognize and Lower Your DTI Ratio

Now that you’ve decided to continue pursuing a new home, it’s time to recognize, understand, and lower your DTI, or debt-to-income ratio. This ratio helps you and mortgage lenders understand how much debt you have compared to how much income you will be receiving. More so, lenders are interested in it to see if and how quickly you can pay back your debt. The faster you can pay it back, the lower the risk you are to the financial institution.

However, you can lower your DTI in two ways, either increasing your monthly income or reducing your monthly debt.

Consolidate Your Student Loan and Credit Debt

Simply put, the best way to reduce your DTI without paying it off completely is to consolidate your debt as much as possible. Using this method, you would combine your debts so you only need to make one, lower monthly payment instead of multiple payments.

Work on Improving Your Credit Score

Your credit score plays an incredibly important role in determining whether or not you will be approved for a mortgage. As long as you have been making payments on your debts on time every month, your credit score will not really be affected by your debts. If, for whatever reason, you have fallen behind on your loan payments, you will need to take the time to improve your credit score. Be sure to check your credit score before applying for a mortgage; it might be better than you think.

Additional Factors to Consider When Buying a House

When deciding whether or not to give you a mortgage, the lender will consider more than just your debt. This means that there are other ways you can increase your chance of being approved for a mortgage. Here are are few of those factors:

1. Down Payment

The more money you are able to put down upfront, the less money the bank will need to lend you. By making a large down payment, you can increase your chances of approval. If you have a lot of debt or a low credit score, consider saving up so you can make a 20 percent down payment.

2. History of Employment

Your income is another important factor that lenders look at. If you have been working at your job for less than two years, banks see you as a higher risk. You may be laid off or quit your job, leaving you unable to repay your loan. Be sure to build a long work history before applying for a mortgage.

3. Savings

The bank will also look at how much money you have in your savings account. They will use this information to ensure that you have enough money saved up to cover closing costs and your future mortgage payments. The more you have saved up, the better you look.

Though buying a house when you have debt may seem impossible, it is anything but. As long as you are able to pay your mortgage on time and you can prove it to a lender, you will be able to purchase a home.