My Inside Secrets for Buying a Home

Buying a home for the first time can be confusing. That’s why the tips and strategies you’ll find in my 8-week series will set you on the right path. It’s our own unique approach and a “behind the scenes” glimpse of what you should look out for and consider when starting your own search for a home.

Is student loan debt holding you back from being a homeowner?

You’re not alone.

Many first-time buyers are worried that their large student debt takes them out of the game when buying a home. But, most of the time, it doesn’t!

So, don’t automatically assume you’re facing a roadblock to homeownership if you have student loan debt, most everyone does, even people who have bought a home.

There are ways to work with lenders and assistance programs to make your first home purchase a reality — and even more affordable despite your student loans.

I understand that you may be grappling about whether you should pay off your student loan debt first before you even purchase a home. That could be an option but don’t make it your only one.

There are some other options for you to consider so you don’t have to delay years until becoming a homeowner, especially if you have substantial student loans.

And always remember to please consult with your own financial advisor to determine what is best for your situation.

How Lenders Look at Student Debt

Let’s get to the basics first. When you buy a home, a lender will look at your debt-to-income ratio or DTI.

It’s the amount of recurring debt you have monthly compared to your gross monthly income.  In a lender’s eyes, your DTI is more important than your credit score or how much money you have for a down payment.

Why?

A lender needs to consider your recurring debt — such as a car loan, credit card payments AND your student loan(s) — in order to determine if you can afford more debt with a monthly mortgage payment.

However, most lenders like to stick to the 28/36 rule. And that’s where the 36% DTI from above comes into play.

• The 36% is the back-end ratio and equals your entire monthly housing costs expenses (principal, interest, mortgage insurance, property taxes) plus other debts (student loan, car loan, credit cards, etc) divided by your gross monthly income. It’s the DTI we explained above, and you don’t want to go above 36%.
• The 28% is part of the front-end ratio equals your monthly housing expenses (principal, interest, mortgage insurance, property taxes) divided by your gross monthly income. Your other recurring debt is not included. Again, a lender doesn’t want to see it above 28%.

Keep in mind, your DTI and the 28/36 rule has nothing to do with your credit score or how well you pay back your debt. It’s looking at the amount of debt obligation you currently when compared to your income. Not whether you’ve been good at paying your student loan and other debt each month. (But keep doing that too!)

And that’s why it can be frustrating for many first-time buyers with student loan debt who have good credit scores.

How to Lower Your DTI

If you need to lower your monthly debt and obligations, start with your student loan lender(s). Here are some options to consider. Remember to always consult with your own financial advisor before pursuing.

• Graduated repayment plan – payments start low and rise every two years as your income should rise.
• Loan consolidation – if you have more than one student loan, combine them into one with a lower interest rate.
• Lengthen your payback term – spread out your loan repayment over more years to lower your monthly obligation. This will increase your long-term interest payments so carefully weigh the pros and cons of this strategy.

Examine all of your financial obligations and find other ways to lower you DTI:

• Consider bumping up your monthly income with a side job … every little bit could help your cash flow and savings.
• See if you can negotiate a lower minimum monthly repayment requirement on your credit cards, especially one that is on the higher side. Some credit card companies are willing to work with you if you have a good credit score and payment history.

Shop Around for Lender

When you have student loan debt, you need to find a mortgage lender who is willing to work with you and offer programs that may be geared toward borrowers just like you.

Steer clear of lenders whose underwriters just look at your entire balance of student loan debt and not your current monthly payments compared to your income.  You will likely not qualify for a mortgage loan with them.

It won’t matter to them if you have lowered your monthly payments with a graduated repayment plan – they will calculate your DTI by using the percentage of your total loan balance.

Many lenders work with state and federal assistance programs, and may have a better track record when dealing with first-time buyers with student debt.  Your college or graduate degree is worth something and it should continue to advance your career and your earnings.

These programs below will help jump start your ability to make home ownership a reality.

Keep Increased Loan Limits in Mind

In 2021 the Federal Housing Finance Agency raised the conforming loan limits to a maximum of $548,250 in the Greater Cincinnati area. Now it can be easier for many buyers to qualify for conforming loans backed by Freddie Mac and Fannie Mae. This means many buyers won’t need to qualify for a jumbo loan, which requires a larger down payment. This is good news for those of you with student loan debt and constrained cash flow.

The Ohio Housing Finance Agency (OHFA) offers down payment assistance, career-related interest rate discounts and other loan products to make buying a home or condo easier. Here are several programs that they offer:

Your Choice! Down Payment Assistance: allows homebuyers to choose either 2.5% or 5% of the home’s purchase price. Assistance can be applied toward your down payment, closing costs or other pre-closing expenses. Down payment assistance is forgiven after seven years. If you sell or refinance your home within seven years, you must repay all of the assistance provided.

Grants for Grads: provides a mortgage interest rate discount to recent graduates who earned an associate’s, bachelor’s, master’s or doctorate degree within the last 48 months. These degrees must be from accredited schools recognized by the U.S. Department of Education. This program includes 2.5% or 5% down payment assistance, which is forgiven as long as residents remain in the state of Ohio. If you sell your home and move out of Ohio within five years, you must repay some or all of the assistance provided. The assistance is forgiven at 20% per year over five years

Ohio Heroes: offers a mortgage interest rate discount to eligible residents who serve the public: • U.S. Veterans, active duty military or member of reserve components (includes a surviving spouse) • Police officers, firefighters, volunteer firefighters, EMTs and paramedics • Physicians, nurse practitioners, nurses (LPN and RN) and STNAs • Teachers (pre-K through grade 12), administrators and counselors

Mortgage Tax Credit: OHFA provides eligible first-time homebuyers with a tax credit to help with homeownership expenses. First-time buyers get a tax credit of up to 40% (up to $2,000) of their annual mortgage interest when using an OHFA mortgage loan. Tax credits provide a dollar-for-dollar reduction of your federal tax liability, and you can still claim the remaining percentage of your mortgage interest tax deduction.

 Next Home: OHFA’s Next Home program provides 30-year, fixed-rate mortgages and down payment assistance to buyers who currently own a home, or have owned a primary residence in the past three years.

 Homebuyer Education: Qualified buyers are required to complete free homebuyer education. Information on OHFA’s streamlined education program is available on their website, or you may complete a course offered by any U.S. Department of Housing and Urban Development (HUD)-approved counseling agency in Ohio.

Homebuyers may be able to combine multiple programs and products together. Please ask your mortgage lender what programs you may be eligible to combine.

 

Physician Loan: A physician loan or “doctor loan” is a mortgage specifically for medical professionals that usually doesn’t require a down payment. With other loan types, lenders often want borrowers to pay private mortgage insurance (PMI) if they’re making a down payment of less than 20%. Physician loans make it possible to skip paying for both a down payment and PMI if you happen to be a doctor.

Physician loans are meant for new medical professionals just entering the field. Doctors are often at a disadvantage when applying for a regular mortgage early in their career because they usually have a large debt-to-income ratio (DTI) after medical school and may not be able to provide proof of employment and income if they have just graduated or started their residency.

Physician loans take all of this into account and make some special allowances for the unique circumstances of a medical career. It may seem unusual for a lender to allow borrowers to take on a mortgage when they have a large amount of debt and are just starting out in their careers, but they have doctors’ career trajectories in mind.

Despite lacking significant income early on due to medical school debt, doctors have the potential to earn more money in the future and are less likely to default on their loans. With this in mind, lenders are more willing to make a few compromises.

 

Tapping into Federal Loan Programs

There are several government programs that offer loans to borrowers with student loans. Each has different requirements and may not be a good option for you. However, one may make your homeownership dreams comes true.

• Fannie Mae HomeReady Mortgage — allows up to a 50% DTI and 3% down payment.
• VA Loan Guaranty – Buyers who have served in the military can qualify for a loan with 41% DTI. That can be overridden if some of your income tax free.
• FHA Loan – Usually allows a 43% DTI but will sometime allow a higher DTI on case-by-case basis.

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Are You Ready?

Evaluate if you’re truly ready to be a homeowner even though you have student loans to pay back. Homeownership is both a big financial and lifestyle commitment.

Honestly answer questions about yourself. Do you have a good job with steady income with expectations of more earning power? Do you plan to remain in the area for the next 5 years minimum? Have you been paying back your student loans each month and have some money saved? Is your DTI not too high and you’re willing to find an assistance program that could help?

As a first-time buyer with student debt, you may need to lower your expectations for your first home, maybe change locations or buy a townhome/condo instead of a single-family house.

Focus on getting your first home and clear that hurdle. If you do it right the first time and are not house poor, you’ll be able to move up to your next home in later years.

You invested in your education and it took time to get your degree and start your career. It’s almost the same with becoming a homeowner. It takes time but your first home can lead to your next and so on as you get more financially secure.

Questions and Planning Ahead

I am here to help you determine if homeownership is right for you now or in the near future. It does take some planning even if you don’t have student loans, so give me a call and we can come up with a plan based on your timeframe.

So, don’t let student loan slow your home buying dreams come true.

Up next week is the final article in My Inside Secrets to Buying a Home series. You’ll find out why Buying a Home Is Like Falling in Love! It’s a topic you don’t want to miss.