Buying a dream house is a great realization of one of your life’s main goal. You can now start to build a family and have little kids playing in the front lawn with your dog trying to run with them. Weekends would mean grilling food with your friends and neighbors at the back yard. while the children are swimming in the pool.
With this scenario playing in your head for as long as you can remember, you troop to a private lender to apply for a mortgage loan. As you sit there, your college life flashes right in front of your eyes. You see all the times you had to ask your parents help in filling-out the Free Application for Federal Student Aid or FAFSA. You now start a mental count of all the student loans you took out and used to pay for college.
There are a lot consumers who are looking to get the same dream. And there are actually a lot of people who are already making payments on that dream house. In fact, Federalreserve.gov shares that the total outstanding mortgage debt as of first quarter of 2014 is at $13.2 trillion. Only the student loan debt amount comes close to this at $1.2 trillion.
As you do the mental computation, you hope that the lender can see through your college debt amounts and see that you have the potential to be earning big amounts in the coming years. You hope that they see your employment will be a steady source of income and understand that your salary will have nowhere to go but up.
Challenges in purchasing that dream home
There are quite a few challenges in buying a dream house and the most glaring obstacle are student loans. This is especially true for recent graduates or for students who have simply separated from school. The student loan, which allowed the student access to higher education is now a prohibitive amount as they try and pursue their dreams armed with a college education.
There are some people who feel that they are being punished for wanting to better themselves and get a college education. Their desire to have a better life comes at a hefty price in the form of college debt. And those goals like buying a dream house now seems much farther from realization. Here are some of the problems of consumers who want to get a mortgage loan but has student loans
- High student loan debt. The amount of student loan will play a part in the overall assessment of the lender of your application. It is not the only thing they will look at but it can influence their decision to approve your loan. The bigger your debt, the higher your debt-to-income ration will be. This is what lenders look at to verify how much more income you have to make possible payments of the mortgage loan. The higher the ratio, the bigger the possibility of possibly skipping a payment when faced with tough financial challenges.
- Inability to save up for a downpayment. The bigger your student loan payment amount, the harder it is to save up for a downpayment on the house. Once you graduate or simply separate from school, there is more to life than just student loan repayment when it comes to expenses in the household budget. There are living expenses to think about and possibly some credit card bills. You might also be renting which will increase the monthly expenses. All these factors contribute to a smaller amount that you can put aside for downpayment.
- Starting salary is not ideal for mortgage payments. With all the expenses every month, your starting salary might not be able to accommodate all the payables every month especially when a mortgage payment is added. It may still be able to barely cover all the payables but not having anything left after settling all financial obligations can set you up for debt down the line.
- Credit history is also important. This is something not all graduates have worked on or prioritized while still in school. The main agenda was to pass and graduate with the degree. But the credit score is one important factor for the lenders. They see this not as the applicant’s ability to pay but the borrower’s attitude towards payment. The higher the score, the better they are in handling payments. The lower the rating, it means that there is a big possibility that they might miss the mortgage payments just like the other payment they have missed in the past.
Addressing the challenges to make that purchase
With all these in mind, how will a graduate proceed in buying a dream house? Are they left with just the repayment on the loan and settle for a rent? Graduates need to remember that there are always solutions to problems. It may not directly solve the issue but there are ways to soften the blow. Here are a few things that could be considered to increase the chances of getting that dream home in spite of a high student loan.
- Consolidate your student loan. This is a great repayment program once you start repayment on your student loans. It is important to look at student loan consolidation reviews to look for the best company that can help you in your goal of making repayment as easy as possible. These experts can help you look assess your current situation and with that, look at various options available especially in repayment.
- Income dependent repayment. Once you consolidate your student loans, it is best to look for an income dependent repayment plan. There are about four of these types in federal student loans according to ED.gov. These are Income-Based Repayment Plan, Income-Contingent Repayment Plan, Pay As You Earn Repayment Plan and Income-Sensitive Repayment Plan. This can help you lower down the amount you have to repay for your student loans. Though you must understand that it will also increase the interest payment over the life of the loan.
- Weigh the option of a private mortgage insurance. If you are really unable to make the 20% ideal downpayment in buying a dream house, you can still opt for a lower downpayment. But you will have to factor in payment for a private mortgage insurance or PMI. This covers the lender in case you default on the mortgage loan. This amount will be added to the monthly payment. Compare the amount of your monthly mortgage with PMI versus your rent. If the former is lower or just slightly higher than the rent, then that might just work.
- Establish yourself first or look for extra source of income. Your salary negotiation skills will be put to test in your interview before you join in the company. Most businesses will really have a set salary amount for new hires and there is nothing you can do about it. While you are trying to prove yourself in the workplace. consider looking for a part time or a side business you can operate on a flexible schedule. An added source of income can be a great advantage when you are buying a dream house.
- Pay on time all the time. To address the credit score, try to make payments on your financial obligations on time all the time with the right amount or higher. Making payments on credit cards in a timely fashion can help improve your credit score. This goes the same for your student loans. While you are preparing to make that home purchase, do not forget to make payments on your student loans because missing them might hurt you in the long run.
Minimizing the effects of student loan while in school
ASA.org shares from a recent survey of student loan holders that about 75% of the respondents said that their student loan has, in one way or another affected their decision in buying a dream house. This is a big number and would have an adverse impact on a consumer driven economy.
Buying a dream house should not start when you are already sitting on the chair across a lender. It should start earlier in life and that desire can help guide you in making better financial decisions especially with student loans.