Pay Off Your Student Loans, or Save for a Down Payment?

Dated: April 7 2020

Views: 298

    

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.

Ready to Find Your Dream Home in Vero Beach?

Search:

 

 

 

 

Blog author image

Chip Boyer

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.....

Latest Blog Posts

Broke a CFL Bulb? Here’s How to Handle Cleanup

Compact fluorescent lamps, or CFLs, are small fluorescent light bulbs that use up to 75 percent less energy than traditional incandescent bulbs. If your household is like most you probably use CFLs

Read More

3 Great Tips for a High-Style, Lower-Cost Kitchen Renovation

The kitchen is the heart and hub of the home and you want it to be as functional, welcoming, and stylish as possible—without spending a whole lot of money. Heed these three tips to renovate

Read More

Moving to Vero Beach? Take a Day Trip to the Heartbreak Hotel (Yes, Elvis Presley’s Heartbreak Hotel)

If you’re buying a home for sale in Vero Beach, you’ll be glad to know that there are plenty of quirky and cool attractions in the area – and one of them is the Heartbreak Hotel,

Read More

3 More Tips and Tricks You Can Use to Make Your Small Bedroom Look Bigger

Your bedroom may be a little small, but it doesn’t have to look or feel like it. Here are three more tips and tricks for a bigger-looking boudoir.Expose the WindowsLeaving your bedroom windows

Read More