Let me start off by saying, if you have student debt, you are not alone. As someone who has completed two master’s degrees, I feel you. In fact, between my partner and me, we have collectively been in school since we started kindergarten (he’s currently finishing up his second master’s degree – not that we’re competitive and keeping score or anything). So we get it: school is the best, the student life rocks, and you can never get enough. But unfortunately, going back to school sometimes also means taking on debt – debt that can slow you down from achieving your long-term financial goals.
Your student debt doesn’t need to get in the way of your homebuying aspirations. Here are some helpful ways to approach the homebuying process with student debt in tow.
1. Know that there’s no right answer.
There is absolutely nothing wrong with purchasing a home while you have student loans – as long as you are comfortable with taking on more debt.
There’s also nothing wrong with waiting to purchase a home until your student loans are paid off, or in a more manageable place, as long as you are comfortable with renting for a while longer.
It all depends on your financial goals and your plan to get there. Knowing your aspirations and timeline is key to deciding the right path for you.
If you’re still figuring out your financial goals, check out Kelley Nayo-Jahi’s recent blog post about “How to Take the First Step Toward Financial Wellness.”
2. Use your student loans to increase your credit score.
Credit scores are the financial industry’s way of giving people grades. Unfortunately, unlike school grades that reset class to class and year to year, our credit score grade travels with us long-term. However, there are some simple ways to make sure you end up with an A- (or at least a B+) credit score. In fact, you can use your student loans to your advantage to increase your credit score. By making your student loan payments on time, you are demonstrating to your student loan provider that you are a responsible, diligent, and trustworthy person to receive a loan. Each time you make an on-time payment in full, your lender will report a slight boost in your publicly available credit score. It’s like those kids in your class who always turn their homework in on time – eventually, you begin to trust them more and more to handle bigger and bigger responsibilities.
3. Find out how much your student loans are impacting your DTI.
Buying a home is all about your debt-to-income (DTI) ratio. When lenders evaluate whether or not you qualify for a mortgage, they look at how much money you make and how much you are obligated to spend on a monthly basis (including student loan payments).
If you want a super simple primer on DTI, check out Jesse Vaughan’s blog post, “What is a debt-to-income (DTI) ratio and why does it matter?”
To calculate, take your monthly income before taxes (check your pay stub if you’re not sure) and write it down.
Then, add up all of your monthly debt expenses, including credit card payments, car payments, and student loan payments.
Credit card payment: $350/month
Car payment: $300/month
Student loans: $500/month
Total monthly debt payments: $1,150
Finally, divide your total monthly debt payments by your total monthly income.
Example: $1,150/$4,000 = 28.75%
If your DTI is below the standard 43%, you might already qualify for a mortgage! If that’s the case, then it’s just a matter of deciding whether you’re comfortable taking on more debt beyond what you’re already obligated to pay in credit card payments, car payments, student loans, or other forms of debt.
If your DTI is higher than the standard 43%, take a second look. What’s your largest monthly debt payment? Think about ways to creatively decrease those payments. If it’s credit card debt, consider aggressively paying it off. If it’s a car payment, consider selling your vehicle and buying an older model or switching to public transportation (if it’s robust and available in your area). If it’s student debt, consider refinancing (see more info below). You may have felt like your student debt was holding you back, but by calculating your DTI, you might realize your student debt payment is the least of your worries, and that you should be focusing on decreasing other forms of debt first.
4. Consider refinancing your student loans.
If it turns out that your student loans are in fact your largest monthly debt payments, you might consider refinancing.
Refinancing is the process of seeing if there are other lenders on the market who would be willing to service your debt at different terms. In other words, you’re trying to see if there’s anyone out there who would be willing to buy your debt and give you a better deal. A better deal might mean a lower interest rate or a longer (or shorter) window to pay back the loan. If you’re able to get a lower interest rate or a longer loan term (or both!), your monthly student loan payments will be lower, meaning you’ll have a lower DTI.
If you took out federal student loans, you can most likely find lower interest rates with a private lender, but you should be aware that you’ll no longer be eligible for any government loan forgiveness or loan repayment programs. This is a real trade-off, so make sure you do your research before making any final decisions.
5. Find ways to boost your buying power.
The easiest way to boost your buying power is to increase your income. However, increasing your income as an educator is not super straightforward. You can’t always just march into your principal’s office and ask for a raise. Depending on the financial incentives available in your school district, you might consider teaching at a hard-to-staff school, teaching a hard-to-staff subject like high school math or special education, volunteering to teach summer school, or seeking additional educational credits.
You might also consider finding a side hustle, but given that most educators are already working excessively long days and workweeks, this isn’t always the most sustainable option.
You could also get creative about buying with someone else. A partner, spouse, sibling, parent – if you add more people with income and savings, you’ll also have more buying power!
Other ways of boosting your buying power might include accessing a homeownership assistance program, like Landed, or others. To evaluate a spectrum of homeownership assistance programs (including Landed’s down payment program), read Emily Eshman’s blog on “Finding the Right Fit: An Overview of Common Homeownership Assistance Programs,” or reach out to our team directly at firstname.lastname@example.org to see if Landed could be right for you.
Interested in exploring what Landed has to offer?