How to Handle Student Loan Debt when Buying

Well, the news is out: the student debt relief program is out for those that qualify. The application is here: https://studentaid.gov/debt-relief/application

As of December 19, 2022, the Court has stopped dispursements. The US Department of Education is fighting it.

So, I thought it would touch on how to buy a home while still having student loans. I personally bought my first house hack prior to paying off my student loans, which I discuss here. 

The big thing to think about is your debt-to-income ratio. I explain more in detail here, but basically a lender will factor in how much monthly debt you have in comparison to your monthly gross income.

This means that unless you are paying off your student loans completely, it doesn’t really affect what a lender sees because your monthly payments are still the same.

So how can you buy while still having student loans? Here are three options:

1. Go with an FHA loan. A Federal Housing Administration loan is a mortgage where the government is ensuring the lender you will pay. Because of this, they will allow borrowers to have lower credit scores (minimum 580) and a higher debt to income ratio (typically 55% of your income can be towards debt rather than 43%).
2. Ask the Seller to buy down the interest rate (or do it yourself). You can pay what are called points upfront that can lower your interest rate. The payback period varies but typically between 5-7 years before you start seeing actual savings. In either case, by lowering the interest rate, you would qualify for a higher amount.
3. Look at multifamily properties. This way you can use the additional income from other units to boost your purchasing power. Typically, a lender will count 75% of the rents. For example, if the second unit rents for $1,500/month, the lender will count $1,000 a month to help you qualify. With interest rates hitting 7%, this could be boosting your purchasing power by almost $150,000! Plus, house hacking is a great way to get into real estate investing!

Of course, every situation is different, and you need to speak to the right mortgage and financial professionals to see what makes the most sense for you. The great thing about real estate is that there are creative solutions for almost every scenario. With rising interest rates, this doesn’t mean your dream of homeownership goes away. It just means getting creative is key to your success.