Should I Pay Off My Student Loan
Paying off your student loan in full will allow you more disposable income, making you a more attractive applicant in the eyes of lenders.
However, student loan debt is cheaper than most other debt, so youre likely to be better off clearing all other loans first. Even then, paying it off early is rarely a good idea.
This money is typically better being put towards your mortgage deposit. A larger deposit will provide you with less mortgage debt and access to a better mortgage rate, saving you more money in the long run.
Its also possible that you could be needlessly paying back a loan that would otherwise have been written off.
Should You Pay Off Student Loans Or Buy A House
After college, life moves fast. You get your first big job, move out of your parents house and start a whole new life on your own. For most people, this also means paying off student loan debt from your college tuition. Having this debt may make big milestones like buying a house seem far off, but there are ways to make the leap from renter to homeowner even if you have student loans. So can you get a mortgage while also paying off student debt? Or should you wait to pay it off before you buy a house?
Every situation is different, so its important to do the right research and choose the best option for you. Luckily, weve done some of the breakdown for you to help you decide whether to pay off your student loan entirely or buy a house.
How Much Will A 25
Your own reaction might be so what? Rates are still relatively low. An increase of another .25% is no big deal, right? That may appear to be a small number, but heres what it means in real life.
If you have a $400,000 mortgage, amortized over 25 years, at 2.59%, your monthly mortgage payment would be $1,810 per month.
That same $400,000 mortgage at 2.84% would cost you $1,860 per month.
Thats an increase in your monthly mortgage payment of $50 a month.
Multiply this by the 5 rate increases some economists are predicting, and you are facing a possible increase in your mortgage payment of $250 a month.
With so many Canadians living paycheque to paycheque, this is going to be a shock. Yet, we shouldnt be surprised.
In 2012, I was interviewed on CBC Radios The Current, on a segment about Doubting Personal Debt and we discussed, even way back then, that debt is a ticking time bomb. Back then I warned that low interest rates were making our debt artificially affordable. I made the comment that we could be in trouble if interest rates rise.
And on the same day in October 2018 as the Bank of Canada increased rates to the highest since December 2008, I was once again on CBC Radios The Current to talk about Canadian debt as part of a special they were calling Debt Nation.
When facing a rising rate environment, you need to consider what an increase in interest rates will do to your personal cash flow.
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Mortgage Agency Guidelines On Federal Versus Private Student Loans In Default
Every year 1 million-plus Americans default on their student loans. Defaulted student loans massively affect consumers credit as well as home-purchasing abilities. A defaulted student loan means it has been moved to collections by the creditor. For federal defaulted student loans this will occur after 270 days without payment. For private defaulted student loans, the accounts go into collection status after 120 days after nonpayment. A student loan going into default can cause a borrowers credit score to drop 60+ points. A steep drop in consumer credit scores will affect their ability to qualify for various programs as well as the most competitive interest rate possible. There is no way a borrower can qualify for a government-backed mortgage if they have delinquent federal student loans. The federal student loan needs to get out of arrears and into rehabilitation before they are able to qualify for a government home mortgage. However, borrowers can qualify for government and conventional loans if they have private defaulted student loans.
How Does A Student Loan Affect A Mortgage
When mortgage lenders are deciding how much money they will lend to somebody they focus on three key things. First is how much money you earn. Second is how much money you already have committed each month. Third is your track record of repaying money that you owe.
The more you earn the more you can borrow, usually.
The more you owe the less you can borrow, usually. But remember, the lender is more interested in your monthly payments on what you owe as opposed to the total figure. This means that two people with the same income, one with a £1,000 student debt and one with a £8,000 student debt might be able to borrow the same amount if their monthly loan payment is the same due to being on the same salary.
Finally your track record will be assessed by a review of your . The higher the score, the more lenders will consider you. You usually need a higher score to be considered by the lenders that will lend the most money and provide the lowest interest rates.
This article talks aboutmany of the things you should consider when arranging your first mortgage.
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What Mortgage Loan Option Is Right For Me
Ultimately, if youre shopping for a home and have student loan debt, it’s always a good idea to talk to a lender. According to a 2015 study by Zillow, the relationship between student loans and homeownership is seemingly nonexistent. So student loans should be nothing to stop you. No matter how close you are to buying a home, at Better Mortgage our non-commissioned loan experts can help shine a light on your best path to homeownership. In as little as 3 minutes, Better Mortgage will show you how much youre likely to be approved for and match you with a loan consultant to talk through your options.
Refinance Your Student Loans
While most college tuition borrowers get their original loan from the federal government, its also possible to refinance with a private lender. So why would you want to? Because according to a recent survey by college lender marketplace Credible.com, one-third of these borrowers can snag lower interest rates with a private refi, which could free up cash for a home loan.
Another way to make room for a mortgage is to refinance and extend the life of your college loan. This results in smaller payments over a longer period of timeand more money you can put toward a mortgage. Of course, one downside is youll end up paying more in interest over the life of your college loan however, it means you can buy a home now, which may well be worth it. To learn more, Student Loan Hero picked six of the best private lenders for student loan refinancing.
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Can You Get A Mortgage As A Student
Yes! Contrary to what you might think, thereâs nothing that says âstudents canât get mortgages’, but it’s a lot harder than finding a good student broadband deal or student contents insurance.
That said, getting a mortgage as a student in the UK can be a little tricky. Not because youâre a student exactly, but because as a student, youâre more likely to:â
- âBe young. This means you might not yet have built up a credit score .â
- Have no income. If youâre in full-time education, youâre unlikely to have a full-time job. This means that lenders might worry about how youâre going to pay back your mortgage. After all, if theyâre going to lend you money, theyâll want to be sure theyâre going to get it back!
- Have no savings. If you havenât yet had a full-time job, you may have struggled to save up enough money for a deposit.
Of course, you might well be a student who has a credit score, has a decent income and has saved up enough money for a meaty deposit. If thatâs you, congrats! Thereâs nothing to stop you from going out and applying for a standard mortgage â after all, youâre not so different from a non-student.
On the other hand, if youâre more like the typical student weâve described, thatâs fine as well. There are a number of mortgage providers who offer mortgages designed just for students like you.
Getting A Mortgage With Student Loans In Deferment
Is a home loan still possible, even with student loans in deferment? The short answer is yes, it is possible. Though the main thing to keep in mind is checking with your lender that the loan type you are going for doesnt involve any strict requirements. FHA loan guidelines, for example, state that student loans in deferment cannot be excluded from your debt-to-income ratio, as mentioned by HousingWire. What does that mean? Even though youre not currently making payments on them, they will still be included in the calculation to see what the comparison between what you make and what you owe is. Which helps determine what you may be eligible for.
In other words, getting a mortgage with student loans is in fact possible. Most of what you will have to work around will include what loan type youre looking for, your financial history, and whether your student loans are in good standing. Communication with both your local loan officer and your student loan servicer will be crucial to an easier journey to homeownership.
About the Author: Adam O’Daniel
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Qualifying For A Mortgage With Student Loan Debt
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Get Down Payment Assistance
While having a down payment of 20% of the purchase price is great ), most first-time homebuyers cannot put that much down. Donât worry. Youâre not alone.
Many first-time homebuyers with student loan debt havenât been able to save for a significant down payment. Theyâve only recently begun earning more income, and theyâve been paying back their student loan debt.
Thankfully, many down payment assistance programs help cover both the down payment and closing costs on your loan.
The assistance will usually be:
These programs typically have specific eligibility requirements. You may need to:
- be a first-time homebuyer
- have income below a certain amount
- serve in the military or be a veteran
- work in public service
- complete a homebuyer education course
- save a certain amount of money each month
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Living The Dream: Do You Qualify
Like anyone else, you’ll still need to qualify for a mortgage. Unless, of course, you have a handy inheritance or wealthy parents. But let’s face it, most of us don’t fit into that category. But just because you’re a student, doesn’t mean you won’t qualify. You will still need the same criteria as anyone else to get a mortgage: A great credit score and enough equity to be considered. Keep in mind, though, that many lenders have tightened their requirements for mortgage clients. Depending on the kind of home you purchase and the kind of mortgage loan you get, you’ll need to make sure you’re gainfully employedor at least have a form of steady incomeand have a fairly low debt-to-income ratio. And don’t forget your down payment. If you try to get a conventional mortgage, you’ll have to sock away as much as 20% of the total purchase price to put down.
We’ve tried to make things simple so you can visualize what you’ll need to pay for a mortgage. So here’s an example of what some of the costs will be for a $300,000 home, according to realtor.com:
- Purchase price: $300,000
- 20% down payment: $60,000
- Monthly payment for a 30-year fixed rate mortgage at 3.551% interest rate: Principal + Interest + Property Taxes + Insurance = $1,449
If this scenario is out of your price range, there are other options if youre a student seeking a home mortgage. Know from the outset that you have to be at least 18 to apply for a loan and purchase a home .
Usda Mortgage Guidelines For Student Loans
If youre considering a USDA home loan and have student loans to repay, there are also guidelines to consider.
Generally, lenders look for a DTI ratio of 41 percent with a USDA loan, but it can exceed that in some circumstances. If youre making fixed monthly payments on your student loans, your mortgage lender will consider whats on your credit report or student loan statement for your DTI ratio.
If your student loans are deferred, in forbearance or youre on an income-based repayment plan, however, your lender is required to factor in 0.5 percent of your remaining student loan balance, or whatever the current payment is within your repayment plan.
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What Lenders Think Of Student Loans
To understand the process of getting a mortgage with student loans, take a minute to understand what lenders think when they see student loans.
The biggest concern that lenders have is whether you will be able to make timely mortgage payments. The more debt you have, the less likely they feel that you can keep up with payments.
Debt-to-income Ratio
One of the big factors that lenders consider is your debt-to-income ratio or DTI. This figure is a percent and represents the amount of your monthly income that you have to use to pay your debt.
You can calculate your DTI by adding up any loan payments, rent, insurance costs, minimum credit card payments, and court-ordered payments . Divide this number by your monthly income before tax. You can get a percent by multiplying it by 100.
Lenders tend to prefer to see a DTI of 50% or less.
Student Loan Mortgage You Can Have Both
Mortgage lenders dont look at how much your total student debt is, they look at how much you pay each month towards your loans. To put it into perspective, the average student loan debt in 2020 was $32,731, but as recently as 2019, people were borrowing an average of $37,782 for new cars. For lenders, its not about the type of debt you have, theyre more interested in how well you manage your debt.
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How Can I Qualify For A Mortgage With Student Loan Debt
- By Alondra Segoviano | Last updated December 14, 2021
If youre worried you cant get a mortgage because of your student loans, youre not alone. With more than 44.7 million Americans with student loan debt, its becoming increasingly common for first-time homebuyers to already owe thousands of dollars when buying a home. However, youll need to be aware of how this debt can affect your ability to get preapproved for a mortgage.
Here are the ways mortgage lenders approach homebuyers with debt, as well as everything you need to know about how your student loans can affect the mortgage process.
It’s Time To Graduate And Head On Out There Into The Mortgage World
You now know that you can get a mortgage with a student loan. It’s how you choose to pay your student loans that matters, and the ability to be aware of how they affect your budget. If you haven’t already started regular student loan payments, take this as your sign to start now. Once you’re ready, get pre-approved, so you’ll have a real budget to play with and focus on making your loan payments as regular as possible. Okay, class of 2021, get in contact with the Green Mortgage Team and get house hunting!
-Kyle Green
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