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Student Loans Don’t Have to Hold You Back: Good Planning Will Get You There

Be prepared.

If you’re carrying student loan debt from your education: don’t fret. You may feel like you’ll never be able to achieve life goals such as buying a home, traveling to unique and exotic locations, or even buying a dependable car that’s snazzy and gets you places. But with the right preparation, you will be able to!

While your monthly loan payments aren’t likely to disappear anytime soon, you can still be smart and put yourself on a path to realizing your financial goals.

One important thing to know about future major financial purchases is that you can and should start preparing for them years before. For a home purchase in particular, there are several steps you can take right now to be well prepared when you have the budget flexibility to make that move.

What Lenders Look for When Approving a Mortgage

Lenders want to minimize the risk they take on, so presenting as a good option for them to lend to is critical!  They look at specific factors within your finances when making a decision to approve a mortgage, especially after the mortgage crisis of the Great Recession. And these are things you can begin now to prepare for future homeownership.

1. Lenders will always examine your credit score (or FICO score), and it can take years to bring your credit score up to an amazing level. Your score is a number between 300 and 850, and the higher the number the better it is for you. The score is calculated based on your payment history on standing debts, as well as the amount of credit available to you that you use. For example, if you have a credit card with a $5,000 limit, but you rarely use more than $1,500 on it in any one month, that reflects well on you and your credit score. The length of credit history you have (how long you’ve been paying off debt) has an impact – if it’s not been very long, a bank can’t be sure if you’ll be committed to paying off a mortgage debt for a long term.
2. Lenders also look at your regular income. Your monthly paycheck value is an important amount because it signals how much money can go toward a mortgage payment. You don’t necessarily need a very high income, but the percentage of income you’ll be paying on a monthly basis comes into play. A rule of thumb for you and for a lender is not to purchase property (or grant mortgages) when the monthly mortgage payment, insurance, and property taxes add up to more than one third of your income.
3. Lenders will review your existing loans, including student, car, and personal loans. They’ll compare the amounts you pay monthly to see how much of your paycheck is left and therefore available to make a mortgage payment. If you’ve been paying them regularly for several months or years, this shows that you’re a lower risk as you are good about making payments on time.
4. Lenders consider the percentage of the total price you’ll be able to make as a down payment. A 20 percent down payment signals the lender that you are a good financial risk are invested in securing a conventional loan, which helps the lender consider you. If you’re not able to meet that goal, there are government loan programs such as a Federal Housing Administration loan for as little as 3.5 percent down.

If you’ve been saving for awhile, making regular payments on your student and other loans, you’re on the right track.

As you near the decision to find a home, there are steps you can take to make sure you’re officially ready to make a move. One of them is participating in a savings program dedicated to saving for a future home purchase, such as AmeriChoice’s Home Savers program.

We’re running through a few more steps below!

Before You Put an Offer in on a House

• Review your credit report and dispute any inaccuracies you find. Make sure you have three lines of credit open (a student loan, car loan, or credit card). Leave older accounts open even if you don’t use them. It’s a good sign if you have a credit card or line of credit that’s open but you don’t use.
• Starting about six months before you’ll be putting in an offer on a new house, avoid opening new credit lines, which will temporarily bring your credit score down.
• Keep yourself in check with making large purchases on credit, as having a debt utilization ratio that’s more than 30 percent right before closing could disqualify you from getting the mortgage loan.
• Keep your funds where they are – moving large chunks around or closing an account won’t disqualify you, but it will make your paper trail harder to nail down, and complicating something is never a good idea when you’re trying to get a loan.

With this info, you’ll be equipped to prepare fully for your big financial decisions. Stay the course of paying your student loans, keep saving and making wise choices with your money, and you’ll make steady progress to major financial moves. Follow these steps to make sure credit unions, banks and other lenders give you serious consideration for a mortgage. To ensure you’re making progress toward your goals, check out our Home Savers program, Guide or First Time Homebuyers, or contact us today!