An entire generation has so much student loan debt that they don’t foresee being able to afford to retire — nor buy a home, for that matter. So will student loan debt keep you from buying a home?
It’s wise to be cautious about buying a home while you still have student loan debt — if you bite off more than you can chew, you risk ruining your financial future to the point that you might not have another shot at home-buying for at least seven years.
That’s the minimum amount of time that a black mark stays on your credit report, but often it lasts much longer than that because outstanding loan balances tend to keep accruing interest until you pay them off.
On top of that, bankruptcy judges have gotten much stricter about whether they’ll dismiss bad debt, instead preferring to restructure it by extending the horizon of the loan burden indefinitely.
Talk to a Mortgage Lender
But let’s back up a bit: A mortgage lender will give you the most expert advice on whether you can afford to buy a home.
You’ll need to be prequalified for a loan anyway before any realtor will accept a bid from you on a home for sale, and many agents won’t even show you a property until they know you have mortgage approval.
Mortgage lenders look to your credit score to determine if you are a reasonable risk for a loan — and this includes having a good track record in repaying your student loans.
Prospective lenders also consider an applicant’s debt-to-income ratio — a comparison of monthly income to debt payments. This helps them to determine whether you can afford a mortgage.
Will Student Loan Debt Keep You from Buying a Home?
That said, having outstanding student loans doesn’t completely rule out the possibility of buying a home.
However, you ought to at least have a clear-cut plan for paying off the student loan balance before you consider adding to your debt burden. And plan ahead for the next five years:
- How much might your income from work increase in a way that might up your monthly student loan payments — and how might that impact what you can afford on a mortgage?
- Do you mind being tied down to a particular location for five years?
- What if the housing market crashes and you’re stuck holding the bag?
- Is this a town you’d be cool with living in for years to come?
- If you had to bail on your current job, does the local economy have ample opportunities in your career field for you to make a quick change?
When you’re buying, you should be thinking of staying in the home for at least two years. Cross that threshold and then when you sell you can avoid paying any capital gains tax, and there should be ample appreciation (assuming the market doesn’t crash) to cover your closing costs, mortgage payoff and hopefully give you some profit.
Saving for the Down Payment
Saving money is really hard when you’ve still got student loan debt — and it’s the down payment isn’t the only thing you have to save for. You’ve also got some major out-of-pocket costs when you go to buy a house.
First, if you like a house and want to take things to the next level, you are responsible for getting the home inspected, and that costs anywhere from $300 to $400.
Closing costs on a mortgage vary but that’s a few thousand dollars, and most mortgages require the buyer to put up some money for a down payment.
Even if you buy a house that only costs about $100,000, the out-of-pocket costs end up around $10,000 including the closing fees — and that was with one of the lowest down-payment loans available.
Needless to say, you’re going to have to become a fiend at saving money (and paying down debt) if you want to afford to buy a home.
One of the niftiest ways to set aside the money just so happens to be the 52-week money challenge. Depending on how much money you set aside each week, you can net up to $1,300 by the end of the year — enough to cover at least your closing costs and inspection fees.
Another technique to keep in mind is asking the seller if you could use mortgage loan proceeds to pay the closing costs, so you don’t have to pony up the cash up front.
You might have a better chance of convincing the seller to do this if you bid more money for the house than what the seller originally asked for.
Consult your real estate agent on the specifics for you, but it’s an option to keep in mind.
Proceed with Caution
Think very carefully about whether to buy a home if you still have any outstanding student loan debt.
In the end, having student loans doesn’t disqualify you from buying a house. However, it can make it more difficult.
Readers, what kind of debt situation do you currently face right now — and have you put some of your goals on hold because of it?
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