Student loan debt has dominated many of the financial headlines since the pandemic started in March of 2020. Thanks to an interest moratorium for Federal student loans since the pandemic’s start, many student loan borrowers have not had to make payments for close to two years or have made interest-free payments during this period.
However, without more governmental intervention, payments are set to resume in May of 2022. The reality is that whether or not you will be required to pay your student loans after May of this year is mostly a moot point as many student debt holders will still look to continue on with their lives post-pandemic. This week, we’ll look at student loans and the mortgage process and tell you what you need to know.
Student Loan Debt vs. Other Debt
If you are a student loan holder, then you often feel as though your student loans are either more important or at least carry a higher priority for repayment than other forms of debt. If you’re juggling other forms of debt such as auto payments, credit card debt, or other consumer loans, your student loan debt likely feels a little different.
The reality for student loan borrowers is that student loan debt isn’t necessarily viewed any differently by mortgage lenders as other forms of debt. While student loans are currently America’s highest amount of debt to the tune of about $1.7 trillion, to most lenders, debt is debt plain and simple. Granted, you may have more student loan debt than other debt, but lenders are more likely to look at the bigger picture than simply what debt you have and how much.
Debt-to-Income
Lenders typically evaluate a borrower based on their ability to repay. After all, lenders are taking a significant risk giving someone money and therefore must make sure that they are mitigating any and all risks possible. Most lenders will look at a variety of factors, but debt-to-income ratio is one of the tools they use to evaluate a borrower’s creditworthiness.
To calculate your personal debt-to-income ratio, start by adding up any monthly debt obligations you’re required to pay as well as your current monthly rent or mortgage obligations. Leave out any discretionary spending such as entertainment, dining out, etc. Then, divide your debt obligations by your monthly income. That number will give you a debt-to-income percentage. In general, lenders will want to see a DTI number of 50% or less.
Positioning Yourself for a Home Purchase
If you’re looking at buying a home, then you’re likely looking for ways to lower your DTI or generally make yourself a more creditworthy borrower. To some, the simple answer to doing so will be to pay off their student loans, but things aren’t quite that simple and many student loan borrowers will struggle to do so before purchasing a house.
Instead, focus on consistently paying your student loan. If you pay more than the required minimum, then you likely can back off the payment in order to afford a mortgage. Additionally, focus on reducing or eliminating any other debt. Credit cards, car payments, and other consumer debt can often be paid off much easier and in a shorter period of time than lofty student loans. Also, improving your overall credit score will help make you a more attractive borrower.
If you’re getting ready to purchase a home and don’t necessarily know where to start, then get in touch with the loan experts at Tidewater Mortgage Services, Inc. Tidewater’s lending team has 20 years of experience working with borrowers of all financial walks of life, so call today!
