So you have student loans and want to buy a house? Great! This article will show you how to get a mortgage with student loans.
Step 1: Lower your DTI
DTI is your Debt-to-Income ratio. It measures how much of your income is going towards your outstanding debt and is a significant factor in getting a mortgage application approved and being eligible for a competitive interest rate. To lower your DTI, consider cutting your spending habits and using a personal loan for debt consolidation to reduce your monthly bills.
Lenders typically look for a DTI of 35% or less. If your DTI is 50% or above, you’ll probably have a hard time finding a lender to approve your mortgage at all. Consolidating your student loans could even reduce your interest and make it easier to start saving for your home.
Step 2: Calculate how much house you can afford
Before applying for a mortgage, you first have to calculate how much house you can afford while still paying off your student loans. You’ll need to find your mortgage’s amortization schedule to do this.
Amortization schedules show how long it will take you to repay your mortgage in full. The shorter the amortization schedule, the faster the payments will come in, and the less money you’ll pay in interest.
Step 3: Save for a down payment
Your next step is to save for a down payment. A down payment is the percentage of the purchase price you pay to the lender to secure your mortgage. You can usually get a lower interest rate on a mortgage if you put down more money.
Most lenders will expect at least 20% of the purchase price as your down payment. It may take a few years to reach this amount, so don’t be surprised if you have sticker shock when looking at houses.
Here are a few ways to start saving quickly for your down payment:
Utilize compound interest
Compound interest is a powerful financial tool that can help grow your money over time. When you invest your money in something, such as a savings account or CD, the interest earned on that money is automatically added to the original investment. This means that the initial investment will have grown by more than the initial interest rate if it has been left untouched.
This extra return can be pretty significant over time and can help you build considerable wealth if done correctly.
Automate your savings
There are several different ways to automate your savings. One way is to set up a systematic investment plan (SIP) where you automatically invest your money in a predetermined mix of stocks, bonds, and mutual funds. This will help you reach your financial goals more quickly and efficiently. You can also consider using automated withdrawal methods such as direct deposits or preauthorized transfers from your checking or savings account to take advantage of compound interest on your savings. By automating your savings, you can ensure that you have the funds you need available when you need them, without worrying about making periodic adjustments.
The bottom line
Buying a house is a major milestone, and your student loans don’t need to prevent you from reaching it.