Plenty of people with student loans buy houses. Maybe you can too! To become a homeowner, you need to look at how much money you owe … how much money you make … how well you manage your finances … and the price of the house you want to buy. Follow these seven steps and decide if now is the right time for you to become a homeowner.
Step 1. Decide if you can afford to buy a house
Financial professionals recommend you spend no more than 30% of your monthly income on housing expenses. These expenses include monthly principal and interest payments as well as property taxes, homeowner's insurance, and mortgage insurance if required. You should include utility bills and some money for emergency repairs too.
To help you make your budget, check out our Mortgage Affordability Calculator. This calculator will estimate many of the costs we just mentioned. Owning a home is great. You just want to buy a house when you are confident you can afford it.
Step 2. Know your debt-to-income ratio (DTI)
Before lenders decide to offer you a mortgage, they consider your debt-to-income ratio (or “DTI”) which is a percentage calculated by dividing your total monthly debt payments by your total monthly income. Student loans, car loans, credit card debt, and potential mortgage debt can all be counted toward your debt-to-income ratio.
For example, say your total current monthly debt payments are $1,000 and your total monthly income is $6,000. That means your debt-to-income ratio is $1,000 ÷ $6,000 = 0.166 or roughly 17%. Now let's say you want to buy a house that has a total monthly mortgage bill of $1,100. That would make your new total monthly debt payments $2,100 and your new debt-to-income ratio would be $2,100 ÷ $6,000 = 0.35 or 35%.
Different lenders have different standards for the maximum DTI you can have and still qualify for a loan. Generally speaking, the lower your debt-to-income ratio, the easier it may be for you to get approved for a mortgage.
Step 3. Know your credit score
Lenders will also look at your credit score before they decide to offer you a mortgage. Your credit score is an estimate of the likelihood you will pay back money you borrow. The range of scores is 300 to 850, and a higher score is better than a lower score. Your credit score influences the decision of lenders to offer you a mortgage as well as the interest rate they might charge you.
Before you start looking for a house, get a copy of your credit report and check it for mistakes. If you have a low credit score, you may want to wait a year or two before you think about buying a house. Consistently paying your current bills in full and on time is one way you might improve your credit score.
Step 4. Save for a down payment
You don't have to make a down payment of 20% to buy a house but many loans require buyers to put some money down. (One exception to this requirement are VA loans available to qualifying active duty military personnel, veterans, and some surviving spouses.) Your down payment amount can determine your need to buy mortgage insurance. It can also affect the total amount of money you pay in interest over the life of the loan.
Step 5. Shop for your mortgage
Talking to lenders like Freedom Mortgage that cater to first-time homebuyers can make a big difference when you buy a home. Lenders have different standards for factors like credit score and debt-to-income ratio. They may offer you different interest rates too. There are also different kinds of mortgages available to you like conventional loans and FHA loans. We have more tips here on how to shop for a mortgage.
Step 6. Get pre-approved
Once you find the specific loan that's right for you, get pre-approved. When you ask for a pre-approval, your lender will ask for documents that verify your income and other financial information and give you an estimate of the amount of money you might qualify to borrow. Pre-approval gives you an idea of how much you can afford to spend on a house. It can also make you more attractive to sellers who'll have greater confidence you can afford their house when you make a bid.
Step 7. Start looking for a home!
With your pre-approval in hand, you are ready to start looking at homes you are confident you can afford in communities where you might want to live. Would you like to learn more about the loan options that may be available to you through Freedom Mortgage? Visit our Get Started page or call our friendly Loan Advisors at 877-220-5533.