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Pay Off Your Student Loans, or Save for a Down Payment?
Dated: April 7 2020
You’ve graduated from college, landed a good job, and now you’re seriously thinking about buying your first home. But… there’s this teeny-weeny thing called student loan debt that could be standing in your way. You’re not alone.
In 2017 the Consumer Financial Protection Bureau reported that 44 million borrowers faced sizeable student loan debt. So should you pay off your student debt before you start saving for a down payment on your first home?
Your Debt-to-Income Ratio is Key
A debt-to-income ratio (DTI) is the amount of your monthly income that goes toward paying debt. A “front-end” debt-to-income ratio is calculated by estimated housing costs divided by gross income. A “back-end” debt-to-income ratio is the percentage of your income dedicated to paying housing costs, student loans, credit cards, and car loans. Generally, mortgage lenders like to see a back-end debt-to-income ratio of 36 percent or less, although the FHA will accept a debt-to-income ratio of up to 50 percent, according to NerdWallet.
If your debt-to-income ratio exceeds acceptable ranges, you should focus on paying off your student loans (and other debt) in order to lower your DTI ratio, and apply for a mortgage at a later time.
Young Invincibles, a national organization that focuses on the expansion of economic opportunity for young adults ages 18 to 34, found that in 2012 half of college graduates with student loan debt had debt-to-income ratios of 49 percent—significantly higher than the recommended ratio.
An option you may wish to pursue is to save money for a larger down payment, which will decrease your required mortgage amount. As a result your debt-to-income ratio may no longer be an issue.
Calculate your debt-to-income ratio to see if obtaining a mortgage with your current student loan debt is feasible. If your DTI ratio is acceptable to lenders, you can begin saving for a down payment first, while paying on your student loans.
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Chip is the IT Manager for Alex MacWilliam Real Estate. He handles the technology needs of the company as well as helping agents in their day to day problem solving.....
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