Tips for getting a mortgage when you’re a millennial with student loan debt

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For millennials — those who reached adulthood around the year 2000 — student loan debt is an all too common challenge that often prevents them from achieving major life milestones, including buying a home.¬†Unlike their parents’ Baby Boomer generation, millennials faced higher tuition fees and stagnant wages, making it difficult to pay off their debt in a timely manner. This led many millennials to carry their student loan debt well past their graduation dates and has been perceived as a difficult burden to cast off, especially when applying for a mortgage.

In today’s post, we’ll go over a few tips for debt-burdened millennials who are eager to buy a home.

1.) Figure out your DTI ratio.

Your debt-to-income ratio (DTI) is a figure that mortgage lenders use to help determine your eligibility for certain home loans and calculate your creditworthiness and potential risk.

Here is how you calculate your DTI:

Take your total monthly debt figure (adding up things like credit card payments, student loan payments, auto loan payments, etc.) and divide it by your monthly income. For example, let’s say your monthly debt looks like this:

$300/mo. – auto loan
$100/mo. – credit card payments
$250/mo. – student loan payments

Total monthly debt – $650/mo.

Now let’s say your monthly income is $1,500/mo. To calculate your DTI, you would divide $650 by $1,500, which would equal 43%. This is a bit higher than most mortgage lenders want to see. Therefore, in this example, you would want to try to lower your DTI before applying for a mortgage.

The general rule of thumb for having a “good” DTI is to keep it at or below 36%. While it may still be possible to qualify for a mortgage with a higher DTI, you may end up paying a higher interest rate or be unable to qualify for the best terms.

2.) Find ways to reduce debt.

A common misconception among potential mortgage borrowers is that they won’t be able to qualify for a mortgage until they pay off their student loan debt. This is not necessarily true. As stated before, mortgage lenders are concerned with a borrower’s overall DTI — not necessarily student loan debt, per se. Therefore, if you can simply reduce your overall monthly debt, you may be able to qualify for a home loan, even with your student loan payments remaining the same.

For instance, you may be able to reduce your credit card payments by transferring your balances to a card with a lower APR. This would, in effect, consolidate your credit card debt and potentially lower the monthly payments.

Another option is to focus on paying off your balances. If you’re close to paying off your car, it may make more sense to wait until that debt is cleared before you apply for a mortgage. Likewise, you may want to focus on paying off your credit cards with lower balances, to eventually eliminate those additional monthly payments.

If you’re unsure of the best way to lower your monthly debt, talking to a financial adviser may help.

3.) Increase your income.

An alternative to lowering your debt obligations is to work on boosting your monthly income. This might require getting a second job, finding some kind of temporary side work, or putting a creative skill to use through selling handmade items or services.

4.) Avoid new debt.

With the exception of consolidating your existing debt, you should probably avoid any new credit applications of any kind. Whether it’s for a credit card, line of credit, retail credit account, car loan, etc. – it’s best to avoid applying for any new debt if you plan to get a mortgage in the next year or two.

5.) Start planning early.

If you think you might be interested in buying a home within the next year or two, you should start putting these practices into place now. Give yourself a year or so to get your debt under control, increase your income and have a solid understanding of your personal finances before you take on the large responsibility of owning a home.

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