It is no secret that the cost of a college education has risen exponentially over the last decade. Because of these costs, more students have leaned on student loans now more than ever before. Even if you nab your dream job after graduation, you are still saddled with tens of thousands, sometimes hundreds of thousands, in debt. When it comes time to apply for a loan this can have a detrimental impact on everything from your loan type to your approval. Fortunately, it doesn’t have to ruin your dream of home-ownership. There are still things you can do to help get approved for a loan. Here are four things you can do to offset the impact of student debt on your credit report.
Non-Resident Co-Borrower. There are three main pillars to loan approval: credit score, down payment, and debt to income. As a home buyer you need to be strong in all three of these areas. With many student loans, your debt to income ratio is most likely impacted. Even if you make a good salary, if there is too much debt, you won’t get approved. The first thing to consider is getting a non-resident co-borrower on the application. This is usually a family member that is comfortable co-signing the application and has low debt and high income. This helps offset the student loan payments and reduces the debt to income ratio.
Eliminate/Avoid Other Debt. If high student loan debts are a burden, you can’t make the problem worse. As backwards as it sounds, it is sometimes easier getting approved for a credit card in college than with established credit. Paying with things on credit is nothing more than putting a quick fix on a problem. Your student debt payments are enough without adding anything to them. Avoid opening any new cards. If you have, avoid adding to your balance. The interest payments on these cards alone can take twice or even three times as long to pay off if you make the minimum payment. The higher the balance, the more debt you have and the less likely you will get approved for a loan.
Seek Alternative Repayment. It is amazing how few students understand their student loan. Even if there are limited other options you should know what you are walking into. You may have options outside of your current loan that can be a better alternative. There are options that are income based that cap the payment at a certain number. You may also have the ability to defer a portion of the payment until a later date. Either way, it is certainly worth exploring all options that can potentially reduce the current payment and increase your chances of getting approved.
FHA Loan. Loan programs and guidelines are constantly changing. In recent years there has been a focus on finding programs to attract more first-time home buyers. These programs have lower credit scores, reduced down payment and higher debt to income guidelines. Currently, the best option for a first-time home buyer is an FHA loan. Not only does an FHA check all the boxes previously mentioned, but it also allows for the down payment to come from a gift. With the minimum down payment just 3.5% of the purchase price, it doesn’t have to be an exceedingly large amount. With FHA interest rates below conventional standards it can be the ideal option for any first-time home buyer.
Excessive student loan debt is an obstacle but doesn’t have to be a roadblock to home ownership. Use these four tips to help keep your dream of home ownership alive.