However, millennials can be homeowners. Student loans do not have to be synonymous with putting your life on hold.
Here’s how you do it:
1. Shop for a home you can afford
It can be easy to get excited about all the trimmings such as granite countertops and stainless steel appliances. However, it’s important to research what you can actually afford. A starter house is just that a starting point. Down the road when your income improves and your loans start to shrink, you can add more luxurious features to your home for the long term or shop around for something better.
There are plenty of good reasons to buy a home sooner than later, namely tax incentives and the opportunity to build equity that will help you eventually buy your dream home.
2. Minimize your debt and shop aroundLenders need to determine whether a buyer can afford a mortgage payment or not. To do that, they will use your income, savings, credit score, and monthly debt-to-income ratio. The debt-to-income ratio is a final tally of all your financial obligations — including car payments, credit card debt and student loans — compared with your income. Generally, mortgage lenders prefer a debt-to-income ratio of 36% or less, including the cost of the monthly mortgage payment.
If a debt-to-income ratio of 36% isn’t realistic for you, shop around, some lenders are more flexible. Regarding conventional loans, if you are able to put down 20% on the cost of the house, some will allow a debt-to-income ratio of 50%. If you are putting down less than 20%, some lenders will allow a debt-to-income ratio of 45%. Another option is to take out an FHA loan, which is a mortgage insured by the Federal Housing Administration. With some lenders, they will allow a 51% debt-to-income with an FHA loan.
Whichever route you take, your path to becoming a millennial homeowner begins with paying off as much debt as possible.
3. Reduce your monthly student loan payments
Having a lot of student debt can give you a high debt-to-income ratio. To lower that ratio, consider refinancing your student loans or switching to an income-driven repayment plan to lower your monthly student loan payment. Sure, your overall student loan debt will increase, but your lender’s primary concern is your monthly payment and whether you’ll have enough extra cash to make payments in full and on time.
4. Make your payments on time
As previously mentioned, mortgage lenders will look at your credit history. They’ll want to see that you are making your payments — whether they be car payments, student loans, or credit cards — in full and on time. A good credit score indicates that you can handle debt responsibly and can be trusted to do the same with a mortgage.
5. Save for a down payment and closing costsWhen buying a home, aside from taking on a mortgage, you’ll be responsible for closing costs (i.e. costs for a home inspection, mortgage loan origination fee, mortgage insurance, and homeowner’s insurance premiums and title fees) and the down payment. On average, closing fees cost approximately 4% to 6% of the home’s price. The typical down payment is 20% of the cost of the home. If you aren’t able save enough to make a 20% down payment and closing costs, you’ll have the option of putting less down and paying for private mortgage insurance each month until you build 20% equity in your home. However, as advised previously, shop around. Some lenders will allow you put down as little as 3% down without having to pay for private mortgage insurance.
It can be a challenge, but millennials can manage student loans and a mortgage. but it is possible. And when all is said and done, the extra responsibility will be worth it.
Hey millennials, ready to take the next step towards home ownership? Contact me today so I can help lead you through the home-buying process in the right neighborhood for you. And remember, friends don’t let friends buy a home without Agent Lady!
About Agent Lady: Cherise Wynne is a leading real estate agent in Philadelphia, helping home buyers and sellers navigate the City of Brotherly Love, with a special focus on first time home buyers. To chat about getting started with your first time home buying experience, click here.