Should you pay off your student loans before applying for a mortgage?
You can get a home loan with student loans. But should you?
As a student borrower, it can be difficult to know the best path to take. Should you repay student loans? Or should you apply for a mortgage with outstanding student loans?
Here are some things to consider when making this decision.
Review your current DTI ratio
First, take the time to calculate your current DTI ratio.
The dollar amount of your debt is less important to lenders than how your debt balance compares to your total income. So, if you have a DTI above 50%, now might not be a good time to buy a home. Instead, focus on paying off some of your debt or increasing your income to lower your DTI ratio.
If you have a relatively low DTI, there’s nothing stopping you from applying for a mortgage. A low DTI ratio tells lenders that you can afford a new monthly mortgage payment.
Evaluate your savings
Your DTI ratio is just one of many factors to consider when pursuing home ownership. In addition to income that can support your debts, you should also assess your current savings.
Before you can close a house, you will need to make a deposit. Even if you qualify for a low down payment mortgage, you could still be forced to spend thousands of dollars up front. Consider home prices in your area and make sure you have a reasonable down payment available.
After closing, you will be responsible for the upkeep and maintenance of the property. When something goes wrong, you can’t call an owner. Instead, you will be in charge of repairs. And you will have to cover the costs that come with it.
The burden of home maintenance costs means homeowners should have an emergency fund in place to cover unexpected repairs. For example, let’s say your refrigerator breaks down. If it is not under warranty, you will be responsible for repairing or replacing the device. It could mean spending hundreds of dollars unexpectedly.
Finally, home ownership is one of many savings goals. You should also assess whether or not you’re on track to reach big savings goals like retirement. If you don’t have any savings for your retirement, it could mean it’s best to put homeownership on hold for the time being.
Optimize your student loans
When you’re considering home ownership, it’s a good time to assess your finances. If you have student loans, now is a great time to dive into the details.
Take a close look at your student loans and make sure the repayment schedule you’re following is right for you. For example, if you have a high-interest loan and a low minimum monthly payment, make sure the payment at least covers the interest incurred. Otherwise, you could take on more debt, even if you meet the required payments.
Plus, explore your refinance options and any rebate programs you qualify for. A little digging could transform the trajectory of your personal finances.