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What to know about student debt and homebuying

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A toy house on top of a stack of $100 bills

06/17/2016 | Author: Michael Schrantz

A couple of friends of mine are having a year full of major life milestones: Their wedding this fall is quickly approaching. One of them just finished her first year of teaching after going back to school for a master’s degree. And, now, they’re closing on their first home this month.

They were able to make it all happen, but for many who are in similar situations, the idea of buying a home after incurring a significant amount of student debt, whether from undergraduate or graduate programs, can seem like a major challenge. A new survey from the National Association of REALTORS® reported that 71% of non-homeowners polled believe that student debt is delaying them from buying a home.

Much is made of millennials' homeownership trends and preferences, but only recently has the effect of student debt started to garner more attention. Senator Elizabeth Warren addressed the topic specifically during the 2016 REALTORS® Legislative Meetings in Washington, D.C., last month.

From an individual standpoint, one of the most important things to keep in mind when entering the homebuying process with student debt is your debt-to-income ratio. It’s not always calculated quite the same—sometimes student debt is included as a percentage of the current balance rather than monthly payments—but generally, it’s the percentage of monthly income that’s spent on all debts (auto loans, credit cards, etc.), not just student loans. In the case of my friends, they were lucky enough to have a lender who worked with them to lower that ratio to the point where they could qualify for the home they had in mind.

Some common ways to lower your debt-to-income ratio include paying down credit cards, getting car loans down to 10 payments or fewer (the point at which some lenders will exclude it from the ratio), finding new sources of income (can you add freelance work?), or if you have a partner, moving debt around might be an option. A debt-to-income ratio of 36% or less is ideal, but in some cases lenders will consider up to a 43% ratio. Your REALTOR® may suggest other ways that apply to your situation.

It can be hard to reduce your debt-to-income ratio while paying student loans—not to mention saving for a downpayment—but taking the long view of your finances and managing your ratio now can pay off in the future when you’re ready to start the homebuying process.

Categories: Buyers
Tags: consumers

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The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney to obtain advice with respect to any particular issue or problem. Applicability of the legal principles discussed in this material may differ substantially in individual situations.

While the Texas Association of REALTORS® has used reasonable efforts in collecting and preparing materials included here, due to the rapidly changing nature of the real estate marketplace and the law, and our reliance on information provided by outside sources, the Texas Association of REALTORS® makes no representation, warranty, or guarantee of the accuracy or reliability of any information provided here or elsewhere on Any legal or other information found here, on, or at other sites to which we link, should be verified before it is relied upon.

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