HOW TO BUY YOUR FIRST PROPERTY WITH A MASSIVE STUDENT DEBT

BY JIMMY POPWORTH

 

Can you buy your dream house with a massive student debt?

The common wisdom is bleak: borrowers all over the country fail to live their American Dream because of student loan debts.

You can do things differently.

There are so many ways you can get around to buying your first property even if you haven’t cleared your student loan debt.

CONSIDER THESE STATISTICS

If you’re struggling to pay off your student debt, you’re not alone. Right now over 44 million borrowers collectively owe a total student debt of $1.5 trillion.

There’s more:

• There is currently $31 billion student loan debt that is over 90 days overdue.
• Almost 2.2 million borrowers of student loan carry a balance of approximately $100,000.
• There are approximately $850 billion outstanding student loan debts among borrowers aged 40 years and below.

Considering the stats above, it’s not surprising that most people consider it an impossible feat to buy their own property before they have paid off their student debt.

You don’t have to wait until you can clear off all your student loan debt. That could take decades.

Take these 8 steps and buy your first property right away:

1. IMPROVE YOUR OVERALL CREDIT SCORE

FICO credit score is a commonly used credit score and it ranges between 350 and 800. The higher your score, the better your credit. If your credit score is 750 or more, you have an excellent credit, but anything below 600 will deem you a poor credit score.

Your overall credit score will determine, to a great extent, your chances of getting a mortgage and how low your rate gets.

A credit bureau will collect information about your past credit record and come up with a credit score. Your potential lenders will assess your level of risk as a potential borrower based on your credit score. If you spot any errors, immediately inform the credit bureau so they can correct it.

2. HANDLE YOUR DEBT-TO-INCOME RATIO

Many of the lenders assess the debt-to-income ratio to make credit decisions and determine the interest rate they will offer.

A debt-to-income ratio is the total percentage of your monthly gross income that is used to make your debt payments every month. This number is one way lenders will assess your ability to manage the monthly payments you make to repay your debt.

Consider these three ways to reduce your debt-to-income ratio:

• Pay off all existing debts.
• Increase your income.
• Or both.

3. TAKE CARE OF YOUR PAYMENTS

The fact that lenders prefer to lend to borrowers who are financially responsible is a no-brainer.

Your past payment record is a vital component in determining your overall credit score. To make sure you always pay on time, set up an auto-pay in your account so that you will directly debit the funds every month.

Your recent payments will heavily influence your FICO scores and hence your future plays a more important role than your history.

Take care of these things:

• Pay off all delayed payments
• Never skip your payments
• Automate your payments, so you’re never late even when you forget

4. FIRST GET A MORTGAGE PRE-APPROVAL

A lot of people make the mistake of finding a home first before getting a mortgage.

Get the mortgage first.

This way you will know what kind of property you can afford. Before you get pre-approved, your potential lenders will assess your assets, income, employment and credit profile among other things.

5. REDUCE YOUR CREDIT SPENDING

Lenders will also examine your credit spending or credit card utilization every month. A good number should be below 30%. Below 10% is a excellent number if you can manage it.

Let’s take for example you have a credit card limit of $10,000. To keep your credit utilization at 30%, you need to limit your monthly spending to $3,000.

Consider these tips for managing your monthly credit spending:

• Monitor your credit spending by setting up an automatic balance alert.
• Request your lender to increase the limit in your credit card.
• Clear off all your credit balance more than once a month to limit your credit spending.

6. GET ASSISTANCE FOR A DOWN PAYMENT

Even if you have a student loan debt, there is a variety of assistance for down payment.

Here are some popular ones:

• FHA loans: FHA loans are insured by the Federal Housing Administration. You can get an FHA loan at as little as 3.5% down payment if you have a credit score above 580.
• VA loans: This is a $0 down payment mortgage available for select military spouses, service members, veterans, etc.
• USDA loans: This is a 100% financing mortgage for home buyers with moderate to low income available to suburban and rural homeowners.

Keep an eye out for local, state and federal assistance programs that you can benefit from.

Although not common, you can also consider a lawsuit loan if you find yourself in the midst of a debt collection lawsuit for defaulting.

7. MERGE CREDIT CARD DEBTS INTO PERSONAL LOAN

Here are two ways to go about it:

• Clear off your credit debt before you apply for a mortgage.
• If you can’t do that, merge all your credit debt by turning it into a personal loan. This will considerably lower the interest rate.

As you can see, a personal loan will reduce your expense on interest over the term of repayment which typically lasts for 3 to 7 years.

Getting a personal loan will also improve your overall credit score as this is an installment loan. Meaning it has a fixed term of repayment. Therefore by turning your credit debt into a personal loan, you will reduce your credit spending and also diversify the type of debt.

8. REFINANCE YOUR STUDENT LOAN

When potential lenders assess your overall debt-to-income ratio, they will also examine your payment of student loan every month.

A smart way to reduce your monthly loan payments is by refinancing it. When your interest rate is lower, your lenders will consider this as a positive sign that your student loan repayment will be made faster. You can find refinance lenders for student loans offering low interest rates at 2.5-3% or less which is much lower than the private in-school loan or federal student loan interest rates.

The underwriting criteria and eligibility requirement vary with each lender, but generally it will include your minimum income, monthly cash flow, credit profile, and debt-to-income ratio.

A student loan refinancing will work with private student loans or federal student loans.

Follow these 8 strategies to manage your student loan debt, and you will be well on your way to buying your first property.

Jimmy Popworth is an online journalist, writer and web developer with an Associates Degree in Applied Science. His writing style is both informative and witty, and his tastes are eclectic.