Unless you have been living under a rock, you know that student loan debt and the recent announcement of student loan forgiveness have been widely reported on in the news. Despite this reduction in debt for millions of Americans, many are still left with hefty balances on school loans.
If you have ever wondered how, if at all, student loan debt may affect your ability to purchase a home, below are three important considerations.
Student loan debt typically does not impact your ability to get a mortgage any more than any other type of debt might.
Types of debt like car loans and credit card debt fall into the same category of debt as a student loan when it comes time to analyze whether or not a mortgage loan is right for you. According to the U.S. News and World Report, “When you apply for a mortgage, your lender will assess all of your existing monthly payment obligations, including student loans, to determine whether you would be able to manage the additional monthly payment. Depending on your situation, the lender will decide whether you qualify for the new loan, and if so at what interest rate.”
Student loan debt could be a barrier to increasing your savings for a downpayment or by having less room in your monthly budget to apply toward a mortgage.
For those with high monthly payments of student loan debt, both principal and interest, it could be that the amount you’re sending to your loan servicer in effect reduces the amount of extra money in your monthly budget to either save for a downpayment or the total monthly amount of money you have on hand to put towards your potential mortgage.
Most experts agree that you should plan to spend no more than 25-28% of your monthly gross income on your mortgage payment (which includes your principal, interest, tax, and insurance). If additional debts like student loans are added to this amount, home buyers could find themselves with much less left over in their monthly budget for discretionary spending.
Student loan debt could increase your debt to income (DTI) ratio which impacts what kind of mortgage interest rate you qualify for.
In short, having significant student loan debt (or any debt, really) can impact your ability to get the best, or lowest possible mortgage interest rate. Nerdwallet shares, “Paying down debt will help improve your credit score, and a higher credit score and lower DTI ratio will help you get a better mortgage interest rate.”
Think that a few points on an interest rate don’t really matter? Consider a $250,000 mortgage with a monthly payment of $2,000. Over the life of the loan with a 5% interest rate, a home buyer will end up paying around $104,000 in loan interest on a 30-year fixed mortgage. With a two-point rise using the same numbers, but this time substituting in a 7% interest rate, a home buyer will end up paying around $199,000 in loan interest on a 30-year fixed mortgage. That’s an extra $95,000 in interest over the life of the loan, all because of having a higher interest rate.
Whether you are ready to purchase a home or simply crunching the numbers, it is a helpful exercise to plug in your own numbers for seeing how any existing debt may impact your future home buying.