It’s no secret that student debt can put a damper on anyone’s finances. Recent studies even reported that over half of Millennials say that their student debt has delayed a large milestone in their lives – buying a home. Housing affordability has worsened in almost all cities prompting many to want to purchase rather than rent. Individuals with student debt can be at a big disadvantage. The student loan debt of the U.S. currently stands at $1.7 trillion burdening more than auto or credit card debt. A third of people today are already in default or delinquency of these debts.
Let’s break down the two biggest areas of how student loans will affect your eligibility for a mortgage.
- Payment History – the frequency and amount of payments impact your credit score tremendously. Credit scores drop if you fall behind on your payments or pay late. They can also improve with consistent and early payments. This will translate through your ability to get a loan and determine your interest rates. Staying current on your student loans is a must. Keep in mind that loan officers will factor in your student loan payments so you may want to consider options like an Income-Driven Repayment Plan as this should lower your payment based on your current income situation.
- Defaults – It would be wise to avoid any defaults on current loans nearing your quest to homeownership as that negatively impacts your chances with loans and mortgages as well. While it can sometimes bring your payment(s) down to zero, it simultaneously signifies financial struggles to lenders. If you have already fallen behind, it may be most ideal to have a parent or willing co-signer buy the house and allow you to make the payments or come up with a workable arrangement that suits you both best.
Buying a home is a stressful and overwhelming process but can be very rewarding. Preparing yourself with the knowledge of how credit and your finances work, you can be on the fast track to homeownership.
