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Ways to Buy a House when you Have Student Loan Debt

2 Debt-to-Income (DTI) RatioBuying a House will certainly find a top place in the preferential list of each and every individual.

Rather than a desire, it actually becomes our dream to own our own pretty house.

As youngsters most of them would have utilized the Student loan programs to complete their education and as they emerge out as graduates, that are laden with the repayment of those loans.

But being indebted doesn’t in any way stop their dreams of owning a house.

They keep searching for all possible ways and means as how they could buy a house and become proud owners of their own house.

There are a lot of factors that has to be given deep thought to before dreaming about buying a house. As a first time home buyer, you will have to analyze and follow some tips that would ease your process of buying a house.

  • Improve your Credit Score (FICO Score):

Credit scores are one important decisive aspect that is considered while scrutinizing an application for loans or credits. The FICO score is the widely used credit score that is considered by most of the lender for approving a loan application. There are various ways by which you can improve your credit scores:

  • Pay your bills on time – This is the major factor that will affect the credit scores of an individual. Adding on to prompt payments, also make it a habit to pay more than the minimum due to increase your credit scores.
  • Keep your Credit Card balances low – One more factor that can earn you better credit scores is to keep your credit card balances well below the 30% margin of the maximum credit available.
  • Avoid sudden credit closures – Do not close your credit card accounts all of a sudden even if you do not use them often. Also see to that you do not foreclose your credit card dues. The ultimate point is that you have to keep your credit repayment track going on in the most favorable manner and avoid new credit cards.
  • Sustain a healthy credit history – You have to illustrate that you are a responsible and honest borrower who repays and maintains a healthy credit history. This will help your loan applications to be favorably considered by the lenders.

 

You can avail your credit scores by requesting for your free annual credit report. Also many mortgagers give provide you with your credit score for free if you apply for a mortgage. Apart from this there are a lot of paid services too.

Constant checking of your credit report is essential to fix any inaccurate information and update correct data’s.

A debt income ratio is the proportion of the customer’s monthly gross income that he actually spends toward paying his various debts that includes principal, taxes, fees, and insurance premiums all put together.

 

If the lender feels that your debt-to -income ratio is not so good, then your chances of getting approved for a mortgage loan are at stake. Even a superb credit track record, a handsome income and being an on-time payerwill all prove useless if your DTI ratio is poor.

Just as it is important to keep track of your credit scores, it is equally important and in fact more important to know your DTI, when you apply for a home loan. Although a good credit score gets you a low-interest loan, it is the DTI ratio, which decides if you are eligible for the loan.

The lender evaluates your DTI, to make sure that you are stable enough to make your payments on time for the proposed mortgage. The only way to improve your DTI ratio and make it look appealing in the eyes of the lender is to literally improve your earning figures.

If you have your student debt running, the following factors might be considered while opting to buy a new home / mortgage:

  • Try refinancing or consolidating your loans to minimize your monthly installments.
  • You can opt for the IBR (Income Based repayment) program, which fixes your installments based on your incomes, thereby improving your DTI ratio.

 

While the above methods might improve your DTI ratio, it basically depends on the type of mortgage that you apply for that will decide your eligibility.

 

2 FICO ScoreHow to evaluate the DTI ratio?

The debt-to-income ratio is one vital factor that affects the decision of the lenders while scrutinizing the application for a mortgage. Basically there are two types of DTI ratios:

  • The front-end ratio – This ratio exclusively shows portion of your monthly income that is spent towards the monthly expenses related to your housing loans, home and land taxes, insurance and other installments that are related to housing expenses. This is the reason this front-end ratio is rightly called the housing ratio.
Formula for calculating front-end Ratio Expected Housing Expense     * 100

Monthly Income

 

  • The back-end ratio – This ratio shows the portion of your monthly income that covers all your monthly dues and installments. The whole lot of expenses that you incur during a month that includes credit card bills, car loans, student loans, home loans, mortgage dues and any other obligation that you pay from your pay check will reflect in this back-end ratio.
Formula for calculating back-end Ratio Expected Total Monthly Expense     * 100

Monthly Income

The Ideal DTI:

The Ideal DTI that is usually preferred by the lenders for approving mortgages is less than 28% front-end ratio and less than 36% for a back-end DTI ratio. These ratios are subject to variations depending upon your credit scores and income factors.

 

Self – Assess your Buying power:

By doing a self-assessment of all your possible incomes and expenses, you might derive at an approximate DTI. You can get pre-approved by a by a lender by knowing the costs that are to be incurred while applying for a home loan. To get you pre-approved the lender usually checks upon your Credit score (FICO Score), your employment and your assets and liabilities. This will give a clear understanding of your credit-worthiness and your ability and home buying power.

Lenders Requirements for the pre-approval procedure:

  • A lender requires a valid explanations and clarifications about any deposits made to your account other than your monthly income. So keep all the supporting documents ready.
  • For first time home buyers, it is a usual practice that their parents or other family members extend their financial support to them. All these financial supports have to be accompanied by supporting letter.
  • Check with the lender before hand about all the documents that might be required for the pre-approval process and get it ready.
  • Additional documents might be called for during the process so keep all documents related to assets and liabilities ready.

 

Is buying a house while paying Students loans A Wise Decision?

There might be lot of questions pestering the minds of fresh grads about buying a house while having a student loan to pay.

Each individual would have various commitments and obligations with varying DTI. So the decision as to whether to go in for a new house first or pay off the student loan first depends on the personal and financial situations of the particular individual.

However buying a house while still having student loans would be still possible if the following factors favor you:

  • You have a good DTI.
  • You have a pretty good amount to make your down payment.
  • Your income would be sufficient enough to incur all costs even after paying your loans and mortgages.
  • Your student loan is of a low-interest type and the monthly payments incurred for student loans are comparatively low.

 

It is an undoubted fact that going in for a home mortgage along with having a student loan running currently will definitely increase your commitments and would pose many threats. You should be well assured that you would be able to overcome these threats and emerge out as successful debt-free individuals.

Without proper planning you might get struck in financial crisis. In order to avoid such an unfavorable situation, it is important to give due care in the following areas:

  • Try consolidating your students loansto minimize yourmonthly installment, so as to save for your down payment as well maintain a good DTI ratio.
  • Manage your Budgets effectively and cut down any unnecessary expenses.
  • Minimize Credit card dues and pay on time to increase your credit scores.
  • Keep a track on your credit scores and DTI ratios.
  • Keep your number of credit cards low and do not go in for new ones.
  • Save by all ways possible to add up to the new home savings.

 

2 first time home buyerDreaming of becoming a homeowner?

The most common challenges that first time home buyers face include:

  • Attaining a stable financial status to get a mortgage approved.
  • Finding a right negotiator and coordinator to get your new home process done in the right way.
  • Saving a pretty good amount for buying a house.
  • Preparing and following a proper budget.

Also following the below mentioned aspects would increase your chances of becoming a proud and self-sufficient house owner:

  • Make arrangements for other expenses that would come up as subsidiary expenses on purchasing a new house.
  • Keep a close monitor on your credit reports.
  • Prioritize your expenses and spend accordingly.
  • Keep your spending as low as possible.
  • Stay focused on making your DTI ratio look good
  • Try paying off 20% of your home loan as down payment so that you will be free from paying mortgage insurance on conventional loans. This will also lower your monthly installments. But be sure that you are well equipped to make the down payment.
  • Do a plenty of market research and get as much references and advises as possible.
  • Don’t go in for any new credits or other extra luxuries that is going to increase your monthly expenses.

 

There are many lenders both federal and private who have wide options for fresh-grads who dream of buying a new house. But it is in the best interest of the individual to opt for a home mortgage or to finish off his student loans first.

 

It is always good to take advice from experienced persons and agents regarding the plans and procedures in buying a house and the various aspects related to payment of dues and installments.

 

Having your loan pre-approved by a lender will also give a clear picture about your financial position and also give a fresh view of your credit scores and your DTI ratios. This will also prove to be a self-evaluation of your financial status and will open up your thoughts and ideas about increasing your credit scores and DTI Ratios.

 

To sum up the most effective ways to buy home:

1.    Start saving as soon as possible

2.    Be patient

3.    Do ample research

4.    Build up an emergency fund to avoid financial crunch

5.    Always go for a second opinion.

6.    Identify your actual requirements.

7.    Segregate your needs and desires

8.    Pay more attention during house inspection

9.    Stick to your budget

10. Consider all the available finance options and then go in for the one that best suits you.

11. Try paying off your existing debts

12. Don’t go in for new debts

13. Make sure your credit score and DTI are good

Always have in mind that the more information you gather for yourself, the more knowledgeable you will be about the total process and will lead to great stress reduction.

 

Adding to that your chances of finding a suitable house according to your needs with the best price will be more likely. You will not only become a proud house owner but also become a self-sufficient individual without getting into financial crunch.

 

So go ahead with your house hunt and find your dream home and make it a reality. Give a smiling start to your new house!

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