First-time homeowners are often younger than the average homebuyer, which means lower income levels, less money saved and, typically, more student loan debt. Concerns about student loans often discourage would-be first-time buyers from pursuing their goal of homeownership. If you’re considering purchasing your first home, these tips can help get you there.
Take inventory of what you owe
Before setting up any kind of plan to save for a home, it’s important to take an inventory of your loans and clearly understand what you owe. Ignoring student loans can ruin your credit and have long term impacts on your financial success.
- Pull a complete listing of your federal student loans from the National Student Loan Data System at www.nslds.ed.gov.
- If you have private loans, pull a copy of your recent credit report from www.annualcreditreport.com, which will show all of your creditors, including private student lenders.
- Get in touch with your loan servicers to update your contact information, evaluate your options, and select a repayment plan that works best for you.
- For federal loans, enrolling in an income-based repayment plan might be worth considering.
Evaluate your debt-to-income ratio
When lenders evaluate you for a mortgage they consider your income, savings, credit score and monthly debt-to-income (DTI) ratio. Your DTI shows all of your monthly financial obligations, such as car payments, credit card debt and student loans, as it compares to your gross monthly income. A good goal to aim for is DTI less than 36%. Ask creditors about options to refinance your debt with a lower monthly payment.
Create a graduated savings plan
Once you’ve worked out your budget and know how much is left each month after expenses, create a plan for saving discretionary income. The goal of a graduated savings plan is to put money toward debt first to reduce the amount of interest being accrued each day. Set a timeline so that over time you slowly shift your plan to put less toward debt and more toward your down payment savings. For example, in the first year, maybe you have $500 per month to work with. You could put 90% toward debt and 10% toward saving for a down payment. In the second year, shift the savings percentages to put a little more toward the down payment. Put 75% toward student loans each month, and 25% toward saving for a home.
Discover your home buying power
Contact a loan advisor to learn more about loan products and the costs associated with a home purchase. Traditionally, a down payment has been 20% of the cost of the home, but in today’s lending environment that is no longer the case. There are various low down payment options available for new homebuyers. A loan advisor can help evaluate all of your choices to help you find the right program that works for your budget.
By Kendall Taylor