The student loans that helped to finance your college degrees may make it more difficult for you to buy a home.
Heavy student loan burdens can delay your home buying dreams for two key reasons.
First off, if you are struggling to pay your student loan payments each month, it can be difficult to imagine saving up enough money for a down payment on a home, especially if you are getting by on a lower-than-expected salary.
And second, too much student loan debt can make it difficult to qualify for a home loan because of its impact on your debt-to-income ratio.
Mortgage lenders use your debt-to-income ratio to evaluate your current debt load and to see how much you can responsibly afford to borrow.
If a potential lender sees that your current debt level is too burdensome for your income level, you will not be approved for a mortgage.
To estimate your debt-to-income ratio, use this calculator.
Your Payment History
How well you manage your student loan payments also can impact your ability to qualify for a home loan.
Steady on-time payments of your student loans are good for your credit record and your credit score. Your payment history accounts for about 35% of your credit score and paying your student loans on time each month and every month is a good way to build up a strong payment history.
But if you fall behind on your student loan payments, your credit score could drop significantly, and this can hurt your chances of qualifying for home loan as well. Especially if you fall below the required minimum credit score for the mortgage you’re seeking.
Rather than fall behind on student loan payments, reach out to your lender about deferment and forbearance. If you are unemployed, under-employed or suffering a financial hardship, you may be able to qualify for a postponement or lowering of your student loan payments.
Deferment or forbearance may give you the break that you need on your student loan payments without hurting your credit. Student loans in deferment or forbearance are not generally reported in a negative way on your credit reports or counted as a negative by most credit scoring models.
If you’re thinking of buying a home at some point in the future, and you’re wondering how your student loans are impacting your credit, checking your credit scores is a good place to start. Using Credit.com’s free tools, you can get two of your credit scores updated every month, along with an overview of what’s affecting your credit, and a plan to help you work to improve it.