personal finance

If You Have Student Loans, It May Affect Your Ability to Buy a Home—Here's How

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Experts are predicting that 2021 will be a banner year for home sales, with more sales expected than any year since 2006.

Yet many people looking to move to affordable locales or take advantage of historically low mortgage rates are already saddled with student loan debt. Nationwide, nearly 45 million Americans have outstanding student loans

Having student loans doesn't mean you can't buy a home. "A substantial student loan balance will make buying a home a challenge, but it's still doable," says Lamar Watson, a certified financial planner and founder of Washington D.C.-based Dream Financial Planning.

Last year, 24% of all home-buyers reported having student loan debt, according to the National Association of Realtors. About 46% of homebuyers ages 22 to 29 had outstanding student loans while 38% of older millennials (ages 30 to 39) had student loan debt.

Those who have debt — including other forms, such as credit card debt, car loans and medical expenses — say it took an average of two additional years to save for a down payment. In addition to making it harder to save, here's how else student loans can affect your ability to buy a home.

Student loans can increase your debt ratio

Student loans can "absolutely" have an impact on your ability to purchase a home, says certified financial planner Ryan Greiser.

That's because when you apply for a mortgage, lenders consider a number of factors to determine if you're a trustworthy borrower, including your debt-to-income ratio (DTI). To calculate your DTI, add up all the debt payments you owe on a monthly basis, including rent, car payments, credit card minimums and student loans. Then divide that by your gross monthly income (what you make before taxes). Bankrate and Zillow also offer helpful calculators.

Typically, in order to obtain a qualified mortgage, which is more stable and has certain protections for borrowers, including ensuring they have the ability to repay the loan, you cannot have a ratio above 43%, according to the Consumer Financial Protection Bureau.

Many lenders, however, have a much lower threshold. "If your student loans are taking up 20% of your income, it is very unlikely they will approve you for a monthly [mortgage] payment of 30% of your income," says Mark Struthers, a CFP and founder of Minnesota-based Sona Wealth. 

Greiser usually recommends aiming to keep your DTI at 36% or less. Still, there are certain cases where he makes an exception, especially if you're willing to sacrifice some luxuries in your life such as vacations, shopping and dining out, he says. 

Stay on top of your loan payments

Before you start browsing homes, it's smart to take a holistic look at your finances, Watson says. That includes taking a hard look at the current state of your loans. "Make sure you evaluate different loan repayment plans, or a refinance, to see if you can make your payments more manageable," Watson says. 

It's especially important that you continue to make timely payments, since missing payments could lower your credit score at a time when lenders are carefully considering this metric. If you're more than 90 days past due on a payment on federal student loans or 30 to 45 days late on a private student loan, lenders will typically report this to the major credit bureaus in addition to charging you late fees. 

If you are in danger of missing a payment, reach out to your lender. And if you haven't already, sign up for autopay, which will keep you from forgetting to make your payment. 

While student loans can make the home-buying process more complicated, don't blindly rush to pay off or refinance your loans, says Silvia Manent, a CFP and founder of Massachusetts-based Manent Capital. It's worth it to explore other channels first. If you expect to get Public Service Loan Forgiveness, it may not be wise to pay off your student loans, Manent says.

Additionally, if your student loan interest is low, below 2%, then putting any extra money in your budget toward investments, rather than paying extra on your student loans, could earn you more in the long run, Manent says. She recommends increasing contributions to retirement accounts such as a 401(k).

At the end of the day, making sure you're able to manage and pay down your student loan debt goes beyond the ability to purchase a home, says Leo Marte, a CFP and founder of North Carolina-based Abundant Advisors. "It's a simple math problem — the more debt you have, the lower your quality of life and long-term financial health will be," he says.

Check out: Don’t buy a home just because interest rates are low—here are 4 things to consider first

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