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How Your Student Loans Might Affect Your Mortgage Process

A new year, a new president, a new forgiveness plan possibly in sight. That’s right, that’s how 2021 is starting off. Some of you may be celebrating, thinking of ways that you can spend that money that otherwise would be going towards your student debt, but hold on for just one second.  

While the idea of student debt being forgiven completely sounds amazing, it’s also just an idea but hasn’t been set in place quite yet. So, yes, the possibility of it happening is plausible, it also may not happen, and you’ll still have to owe thousands of dollars to the government. When we consider buyers who have student loan debt, we’re going to assume that they need to pay all of this back, until stated otherwise. 

You may be wondering, “What does this mean for me if I want to purchase a home, but already have a ton of debt?" 

 

You Don’t Need to be 100% Debt-free to Buy a House

First off, let’s set something straight, you don’t need to be 100% debt-free to buy a house. What we as lenders do need to know is that you have enough money to make your payments after you get your loan. The more debt you have, the more likely you are to fall behind on your payments. 

Debt to Income Ratio

Second, it’s imperative that you understand DTI (debt-to-income ratio). Add all the monthly payments you make - only include regular, recurring, and required payments in your calculations and leave out expenses that vary from month to month.  

Remember to only include the minimum required payment you need to make each month. If you have $20,000 in student loan debt but you only have a minimum required payment of $100 a month, only include $100 in your DTI ratio calculation. 

Let’s break this down debt by debt: 

  • Student loan minimum payment: $100
  • Auto loan minimum payment: $300
  • Credit card minimum payment: $100 

In this example, you’d first add up all of your debts for a total of $1,000. Then divide $1,000 by your total gross income, say, $4,000. Your DTI ratio is 0.25, or 25%. 

That 25% DTI is exactly what we are going to look at when you come to Weber Mortgage to get pre-approved to buy a house. As long as you have a stable income, manage your debt well, and pay them on time, you’ll be in the clear so long as your debt doesn’t go above a 45% DTI. 

Count on Weber Mortgage to Advise You on Student Loan Debt and Getting a Mortgage

What can you take away from this? Keep in mind that we are going to consider all of your debt including every dollar you owe for student loans. Student loan debt forgiveness is just an idea, and while student debt repayments have been put on hold until September. If you have any questions about buying a home with a large sum of debt, please reach out to Weber Mortgage and we’d be more than happy to answer any of your questions.