Don't Let Student Loans Prevent
You From Qualifying for a Mortgage
From Deborah Fowles
Advice for Students and College Graduates:
A study by the Cambridge Consumer Credit Index showed that 75%
of college graduates with student loans said that student loan
payments prevented them from buying a house or car. By following
the tips in this article, you can avoid being in this same boat.
Tuition, room and board, and textbooks are smart ways to spend
your student loan money.
Eating out, buying CDs, clothes, going on spring break, or otherwise
bankrolling your social life, are not.
Owning a home is almost every American's dream, but millions
of college graduates are struggling under such a burden of student
loans and credit card debt that the dream of home ownership
seems totally out of reach. Advance planning, careful spending,
and earning as much money as possible while in school can help
limit the burden of student loan repayments.
Even if you don't directly use your student loan money for eating
out, partying, spring break trips, clothes, jewelry, expensive
haircuts and coloring, electronic gadgets, CDs, etc., you'll
have to borrow more student loan money eventually if you indulge
in these things. Every dollar you save (as in don't spend) is
a dollar less, plus interest, that you don't have to borrow.
Keep this important fact in mind: Student loan money is for
financing your education, not your lifestyle.
You'll be paying student loans off over a period of ten to 20
years, with interest, so keep them to a minimum. Students today
accept student loans as a fact of life, but they don't always
have to be. Financial aid, summer jobs, part-time jobs during
the school year, and careful budgeting and spending can greatly
reduce, and for some people, eliminate, the need for student
Lenders warn that student loan payments that exceed 8% of your
income are considered unmanageable. Most students don't even
calculate what their monthly payments are likely to be when
they're borrowing student loan money, and are shocked when they
have to begin repayment.
Keeping your payments to 8% may seem doable, but 8% should be
the total of ALL your non-mortgage debt in order for you to
comfortably afford your payments. For someone making $40,000
a year, this would be about $275 a month (for student loan payments,
car loan payments, and credit card payments combined), at today's
low rates. As interest rates continue to rise, so will your
future monthly student loan payment.
Rising interest rates will also make qualifying for mortgages
more difficult for many people, but could really put the squeeze
on those with student loans, who may have trouble qualifying
even at lower interest rates.
Strategies To Prepare Financially for Home Ownership
There are things you can do to make qualifying for a mortgage
after college less difficult. Here are a few:
1) If you have $10,000 or more in student loans, you may be
able to consolidate at a lower rate to lower your payments and
use the savings to put away for a downpayment on a house.
2) Avoid credit card debt. Have one or two major credit cards
and pay the balances off every month. If you must carry credit
card balances, transfer them to cards with lower rates whenever
3) Establish a record of paying your bills on time so you don't
damage your credit score, which is key in getting the best interest
rates on mortgages, car loans, and other loans.
4) Check your credit report annually for any inaccuracies and
resolve them if there are any. If you're planning to buy a home,
start reviewing your FICO score at least six months before you
start house hunting, and take steps to improve your score.
5) Avoid taking out any new loans or applying for any new credit
cards in the months before you start looking for a house.
6) Pay off as much debt as you can before starting to house
hunt, to help you qualify for the mortgage.
7) Prepare a realistic budget and make sure you can really handle
the mortgage payments on top of your other debt.
8) Save all "found" money: income tax refunds, bonuses, overtime
pay, and cash gifts, to go towards your down payment or closing
9) Consider a less expensive car and apply the difference in
payments to paying down credit card debt or saving for your