Have student loans? 3 steps to prep for home buying

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Seven in 10 students leave college with more than just a diploma—they’re also saddled with an average of $30,100 in student loan debt.1

If you’ve been shouldering loans for years, it might seem like homeownership needs to remain a distant dream. Yet despite the financial challenges millennials face today, those 35 and younger continue to be the largest group of new homebuyers (35 percent, to be exact).2 With a solid budget and some careful planning, you too could make the leap from renter to homeowner. Start with these three easy steps.

1. Know Your Numbers

This may seem obvious, but don't even think about calling a realtor until you've examined your finances—down to the very last penny. Only after you understand your current finances will you be able to figure out what monthly mortgage payment you could afford.

“People always try to do it in reverse. They go out shopping for a house and get super emotionally attached, and then realize they can’t afford that house,” says Shannah Compton Game, CFP, a financial planner and millennial money strategist. Before you set foot in an open house, she recommends crunching the numbers in your budget and talking with a mortgage broker.

“If you only look at what you can afford, you’re less likely to push past your budget or have a big let down,” she says. The rule of thumb she tells all clients: Your housing payment—including the principal, taxes and insurance—shouldn’t be more than 28 percent of your income before taxes.

2. Consider a Mortgage-Friendly Debt Makeover

The idea of having your debt scrutinized with a fine-tooth comb may make your stomach do somersaults. But here's something heartening you might not have known: Your total debt isn't as important as your monthly debt payments.

"The amount of debt you have actually doesn't factor into the mortgage underwriting process," explains Kristen Euretig, CFP, a financial planner and founder of Brooklyn Plans. "Lenders are looking at your monthly debt payments and the ratio of those to your income. So, if you have a million dollars of student loan debt but you're on an income-driven repayment plan that allows you to pay, say, $100 a month, then that's what they'll consider when calculating your debt-to-income ratio to approve you for a mortgage."

If you don't qualify for an income-driven repayment plan, another way to lower your monthly payments may be to refinance. “If you’re paying more than 6 percent interest on any of your student loans, you might be able to switch to a super-low rate by refinancing,” says Compton Game. And a lower monthly payment doesn’t only mean a mortgage broker may look at your financials more favorably—it may also help you sock away more money each month toward a down payment. That’s a win-win.

3. Establish an Emergency Fund

Real talk: It’s more imperative than ever that you have a savings cushion when you become a homeowner. Now that you're essentially your own landlord, you're the one who will be replacing that fussy furnace or whacked-out water heater. And financial emergencies of this sort are more common than you may think: 60 percent of households experienced a "financial shock" within 12 months, and 55 percent struggled to "make ends meet" after their most pricey unexpected expenses.3 Without an emergency fund to draw from, you’d be stuck putting those big expenses on a credit card and racking up even more debt. Set up an automatic monthly transfer into a dedicated savings account—even $100 a month adds up—to keep yourself out of the red down the road.


1 “Project on Student Debt,” 2016, The Institute for College Access & Success

2 “NAR Generational Survey: Millennials Increasingly Buying in Suburban Areas,” March 9, 2016, National Association of Realtors®

3 “How Do Families Cope With Financial Shocks?” Oct. 28, 2015, The Pew Charitable Trusts.

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