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Graduate To Homeownership Sooner, Even With Student Loan Debt

If you’re like most recent college graduates, part of your monthly income currently goes toward your student loans. Recent statistics found that 70% of college graduates have student loan balances, and the average balance is around $37,000. Managing this debt isn’t limited to your age group, either. Around 13% of people with outstanding student loan balances are between the ages of 30-39, and around 8% are in the age 40-49 group*.

If you’re assuming you’ll have to postpone homeownership until you’ve paid off your loans, think again. Stearns Lending offers several mortgages with qualifying features that differentiate between student loan balances and other types of debt. You may even qualify for a mortgage that can help you to pay your student loans off sooner, so you can begin building equity sooner. Here are a few of the options that may be available to you.

Seller Paid Interest Rate Buy-Downs lower your monthly mortgage payments for the first two years of your home loan.

Here’s an example of how the Stearns Lending Smart Start mortgage program makes homeownership more affordable for homebuyers with student loan debt. If a homebuyer qualifies for a Smart Start mortgage with a 4% interest rate, the homebuyer would pay 2.5% interest on their home loan for the first 12 months and 3.5% on the second year. Stearns Lending would pay 1.5% interest towards the home loan the first year, and 0.5% the second year. Since buy-downs improve cash flow for these borrowers, managing your mortgage and student loan payments should be easier during the first two years after the loan closes.

A mortgage designed for doctors and dentists may be your key to homeownership, especially as your earning potential and student debts both tend to be higher than for other professions. Recent statistics from the Association of American Medical Colleges reports that the average medical school debt balance for graduating students in 2018 was $196,520. Add their estimated undergraduate balance of around $25,000, and this brings the total average student loan balance to around $221,500.

However, Stearns Lending recognizes your career potential by offering a program that excludes your student loan amounts when calculating your debt-to-income (DTI) ratio. A DTI ratio is one way a lender determines if a certain loan amount will be truly affordable, as it compares applicants’ monthly income to their total monthly debts.

Lender-paid mortgage insurance is another strategy to consider. Mortgage insurance is usually required when a borrower buys a home with a down payment that’s less than 20%. These insurance payments are in addition to the monthly mortgage payment. Since cash flow is especially important for borrowers with outstanding student loans, Stearns offers a Seller-Paid Buy-Down program to improve cash flow. Borrowers who qualify can use this additional income to pay down student loans.

While these programs are designed to assist first-time homebuyers, most also require a minimum credit score, also known as a FICO® score. If you’re making all of your student loan and other bill payments on time, student loan debt can actually have a positive influence on your credit. On-time payments help to prove you’re a financially responsible person. Here are some other factors that can impact credit scores:
  1. Keep credit balances manageably low.  Keeping your credit utilization at around 30% or less of your total available credit will look better on your credit report.
  2. Don’t close old credit accounts, even if you never use them. While it may seem wise to close them, the FICO computer algorithm sees longer credit histories as a positive sign.
  3. Use and pay off different types of credit. Credit scores are favorably affected when you responsibly manage a variety of debts such as car payments, student loans, and credit cards.

Click here to learn more about credit scoring and how you can improve your FICO score.
Are you ready to take on the financial responsibility of owning a home? Will taking on a major, long-term debt be something you can manage? Are you confident that your work skills will provide a stable source of income to cover your lifestyle and debts?

When answering these questions, it’s very important to review your priorities and to decide what matters most to you. Whether it is better to continue living with your parents, paying rent, or jumping into the housing market, consider all of your options.

Contact a Stearns Lending mortgage professional in your state or online to learn more, and to get pre-qualified for a home loan so that you'll know how much home you can afford.
 
* New York Fed Consumer Credit Panel.
 
- Sep 24, 2019



 
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