Course 3 – Unit 5: FHA Loans: Mortgages for Buyers with Student Debt

Student Loan Advice For First-Time Home Buyers

Student loans affect your monthly budget which, in turn, affects your ability to qualify for a home loan. However, there are ways to reduce what you owe to the government each month to help you qualify for “more home.”

One method by which to reduce your monthly student loan obligation is to switch to a graduated repayment plan on your loans. A graduated repayment plan is one for which the payment starts low, then rises every two years to meet the rising income of a typical college graduate. With lower monthly payments, your debt-to- income ratio is reduced, which can help you qualify for your home loan.

Loan consolidation is another way to reduce your monthly student loan obligation. It is likely that your student loans are of different amounts, and at different rates of interest. By consolidating your loans, you can lump your principal balances together at, hopefully, a lower interest rate.

You can also request a lengthening of your payback period, known as your “term.”

By lengthening your term to 15 years or 20 years, you can reduce the amount that you owe each month, which lowers your DTI. This will increase the long-term interest costs of your student loans, but will lower your monthly obligation.

Mortgages For Buyers With Student Debt

As a first-time home buyer with student debt, there are a number of mortgage loan programs well-suited for your needs. Many allow for low-downpayment. The FHA loan, for example, which is backed by the Federal Housing Administration (FHA), allows for a downbpayment of just 3.5 percent for borrowers with a credit score of 580 or higher. FHA loans allow debt-to- income ratios of up to 45%, but will allow higher debt-to- income ratios on a case-by- case basis up to 50%. You can also use the FHA home loan if your credit scores are below 580, but a larger down payment of ten percent is required.

The Fannie Mae HomeReady™ mortgage is another loan available to borrowers with student loans. Via HomeReady™, buyers can show a debt-to- income of up to 50%, with certain off-setting factors; and a down payment of just three percent is allowed. The minimum credit score to get approved for a HomeReady™ home loan is 620.

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