Student loan | How to Buy a House when you Have Student Loan Debt | Refinance ...

How to Buy a House when you Have Student Loan Debt | Refinance ...

Posted: 18 Jun 2014 07:14 AM PDT

Are you trying to pay off student loans, but want to buy a home? Before you start the homebuying process, make sure to follow these first time home buyer tips that can limit headaches during any home purchase.

1) Fix or Improve your Credit Score (FICO Score)

One way to do this, on top of paying your bills on time, is to keep your credit card balances at or below the 30% threshold of the max available credit. This can potentially save a buyer thousands of dollars over the life of the loan. Higher credit scores would typically give you better interest rates.
Avoid quick fixes. Do not close existing credit accounts if you do not use them. Also, do not pay all of your card balances to zero at once, unless you can do this every month; any change can be viewed as a quick fix. (In general, you do not want to change the way you utilize your credit.) Quick fixes can negatively impair your credit. In the months leading up to a home purchase, keep paying your bills as you usually do; do not close any old credit lines and try to avoid opening up any new ones.
Maintain Healthy Debt – If you don't have a substantial credit history, lenders might not have enough data to approve you for a loan. Maintaining healthy debt and being a responsible borrower can help you avoid being labeled as a "thin file".
To obtain your credit score, you can request a FREE Annual Credit Report here. Make sure your credit report is accurate and up-to-date. If you have suspicious or dated transactions listed on your credit report, one option is to hire a credit repair agency to send legal verification letters on your behalf.

2) Decrease Your Debt-to-Income (DTI) Ratio

As with student loan refinancing, a mortgage lender will calculate your Debt-to-Income ratio to determine your ability to make monthly payments on the new mortgage. Typically, the maximum threshold in 2014 for acceptable DTI is roughly 43%. Special government programs and lenders might approve borrowers with higher DTI ratios, depending on a variety of underwriting criteria.

The easiest way to improve your DTI ratio, although not that easy for most borrowers, is by increasing your income. Are you due for a raise at work? Can you take on additional freelance work? If so, try to increase your monthly income several months before obtaining your pre-approval letter.

Depending on your student loan situation, you might be able to refinance or consolidate your student loans to obtain a lower monthly payment. Also, you can enroll Federal Student Loans into an Income Based Repayment Program which can drastically improve your DTI as well.

3) Get Pre-Approved to gauge your Home Buying Power

By getting pre-approved by a lender, you'll learn what the costs and down payment requirements are. To determine what you can qualify for, a lender would look at your 2 year employment history, credit (FICO), income, and assets.

Keep in mind:

A lender must look at most aspects of your financial history, at least in short term. All funds need to be sourced and explained; any large deposits outside of normal payroll will be closely scrutinized.
Gifts from family are usual for first time homebuyers. These, too need to be sourced and accompanied by a lender's gift letter.
Always check with the lender that you are giving all documents needed for a comprehensive decision on your preapproval.
A list of documents needed would include 2 years of W-2s, 2 years of federal tax returns, 30 days' worth of pay stubs, 2 months of asset statements.
More documents may be needed once the loan is underwritten. A lender will require all pages of tax returns and bank statements.

There are many federal and private programs geared towards first-time home buyers with minimal down payment requirements, as well as expanded guidelines that enable those who may think they can't afford a home to do just that. To best figure out what your home buying capabilities are, contact a lending professional and discuss your financial situation.

When you're ready to check out mortgage rates, you can get a fast and free rate quote from Quicken Loans by clicking here.

Brendon Fray is a Senior Mortgage Banker with Darien Rowayton Bank of Darien Connecticut. Brendon has the ability to lend mortgages in most states and can be contacted at: 203-669-4148 or bfray@drb-mtg.com.

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