Do I have to repay my student loan before I buy my first home? It’s a common question, but unfortunately not an easy one to answer. The truth is that every situation is different.
What really matters is whether you are comfortable paying off a mortgage (and all the other fun expenses that come with a home) while paying off student loans at the same time.
Still scratching your head wondering what to do? Here are some reasons you should buy and some reasons you should probably wait.
More for real estate enthusiasts
Here’s why you should buy it
1. You don’t need as large a deposit as you think
Gone are the days when you had to cut 20% to get approval for a home purchase loan. Now there are more realistic options. For example, a traditional loan can only cut you 3%. An FHA loan requires as little as 3.5% less. With these rates, it’s a little easier to save a depositwhile still paying off debts.
2. You can always defer payments
A good thing about student loans is that they usually don’t have as high an interest rate as other loans. That said, it may take you longer to pay off your debt (without accumulating large interest) than it would with credit card debt. Not to mention that student loans are unsecured. This means that if you need to, you can defer payments without worrying about the government taking your possessions away.
3. You make enough money to have it all!
Contrary to popular belief, not every millennium struggles with its finances. If you can afford one monthly mortgage, Your student loan statement and everything else you need to survive, why not buy a home? Student debt shouldn’t deter you from buying as long as your wallet is in good condition.
Here’s why you should pay student loans first
1. You don’t have good credit
With traditional loans and FHA loans, you have the option to cut between 3 and 3.5%. But here’s the thing, in order to be approved, your credit must be in good shape. While student loan debt isn’t the biggest factor in determining a credit score, it is still something that lenders look at. If your credit is not good, lenders are less likely to loan you money.
2. Your debt to income ratio is high
How much money do you make in a month? How much of that money do you use to pay off debts? If a large portion of your monthly income is in debt, your debt-to-income ratio (DTI) is too high and most lenders only approve those with low DTI (around 43%). Instead of buying a home, it is a good idea to focus on lowering your DTI.
3. You don’t have an emergency fund
Unless you have an emergency fund (or a large savings account) then you shouldn’t buy a home with student loan debt. Even with a small down payment, you will need money. With closing costs, insurance, furniture, etc., buying a home is expensive. And that’s the way it is to own a house. What if your dishwasher breaks? You want to be able to treat these issues as they come. To do this, you need to put money aside.
Moral of the story: Before you pack your bags and buy your first home, take a good look at your finances.