BreakingModern — If you’re paying rent each month, you likely realize that money could be going toward a wiser investment. When you own your own home, you not only can tax deduct the mortgage each year, but you’re putting money into something that will likely appreciate over time. Best of all, your monthly payment remains the same year after year, letting you avoid the dreaded “rent increase notice” that has become all-too-popular at apartment complexes across the country.
For people still paying college loans, however, that investment can be delayed as they work to pay down their debt. But potential homebuyers shouldn’t assume that college loans will result in an automatic “No” from a mortgage company. In fact, a former student with loans may be in a better position for other types of debt because of a lower monthly income.
“College loans all by themselves do not determine if a buyer can obtain a home mortgage or not,” says Amy Tierce, regional vice president at Wintrust Mortgage in Needham, Mass. “The best thing a millennial can do is pay all loans and debts on time as required to maintain excellent credit, do what can be done to increase income and save for a down payment.”
According to Tierce, lending guidelines require that a person’s monthly debts, combined with the proposed monthly house payment, not exceed 45 percent of a person’s income. Keeping this in mind, use a mortgage calculator to determine exactly how much your monthly payment will be. Then add up your monthly expenses, including the student loan debt, and make sure that the total amount is less than 45 percent of your monthly income.
If the numbers don’t add up, you have two choices: choose a less-expensive home with a lower monthly payment or reduce your debt. You may have to put off purchasing a home for a year or longer in order to qualify for the house of your dreams. In the meantime, you can work hard to pay off as much of your debt as possible.
Another factor in your mortgage approval will be your credit score. FHA loans require a credit score of at least 500, while Fannie Mae and Freddie Mac insist on credit scores of 620 or greater. Before you begin home shopping, check your credit report to see if you’ll qualify.
If your credit score is too low, there are several things you can do to improve it. Obviously you’ll need to pay your bills on time each month, but you can also do little things that make a big difference. If you use multiple credit cards, consolidate your use to just one card as quickly as possible rather than having multiple cards with balances. You can also dispute any erroneous items on your credit report. If the creditor doesn’t respond within a fixed period of time, it will be removed.
Buying a home is a big step. To take advantage of low interest rates and housing prices, adults should begin shopping around for a good deal on a mortgage as soon as they’re financially able. Even if it means buying a less-expensive home initially, a homeowner will position himself to have something of value to sell in a few years in order to move up to something better.
For BMod, I’m Stephanie Faris.
First/Featured image credit: © Monkey Business / Dollar Photo Club
Second image credit: © Rido / Dollar Photo Club