Student loans are one of the biggest obstacles for young home buyers who want to apply for a home loan. They are often included in the buyer's debt-to-income ratio (DTI), which is one factor that lenders use to determine whether a certain buyer can afford a mortgage payment.
The DTI is the percentage of monthly income spent on debt payments, including but not limited to student loans, mortgages, auto loans, child support, and minimum credit card payments. In general, mortgage lenders prefer a DTI of 36% or less, which is why it is important to keep one's credit score in top shape.
There are three ways to do this:
- Reduce debt. Although reducing the amount of one's debt takes time, paying off student loans with a private loan from a family member or close friend at a lower interest rate or with a longer repayment term can help an individual improve his DTI ratio and get approved for a home loan. It will also help to pay off credit card debt and auto loans as soon as possible.
- Increase income. Though income must be documented for at least two years to be included in the DTI, a buyer's college history can make up almost all of that two-year time frame. A new job with a higher salary can also qualify.
- Decrease mortgage payment. Buying a house instead of a condominium can improve one's DTI because homeowners association dues are not included in house payments, hence decreasing the mortgage. It might also help to buy a home in an area with lower property taxes or pay an upfront fee to decrease the mortgage interest rate.
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