This question is an important one to contemplate before you buy a house. Consider your debt-to-income ratio, how much savings you have and your current student loan repayment plan. Let’s walk through the steps to answer this question confidently. Calculate Your Debt-To-Income Ratio
Before you decide to pay off your student loans or apply for a mortgage, calculate your DTI ratio. Thankfully, the calculations are straightforward.
First, add up all your recurring monthly payments. Remember, you should only include your minimum monthly payment amounts. For example, if you have $20,000 in student loan debt and your minimum monthly payment is $100, only include $100 in your DTI ratio calculation.
After you’ve totaled your debt payments, divide the number by your gross monthly income. If someone else is applying for a mortgage loan with you, you’ll need to add their monthly debt and gross monthly income to the calculation, too.
After dividing total monthly debt payments by gross monthly income, multiply the number you get by 100 to express your DTI ratio as a percentage. If your DTI is more than 50%, you could consider a government backed loan such as FHA - or work on paying down your student loans before trying to buy a home.
Evaluate Your Savings
Next, look at other areas of your finances before considering homeownership. If your DTI ratio is good, but you don’t have an emergency fund, you may want to pause your home buying journey to build up your savings.
And bear in mind that most mortgages require a down payment to purchase a home. You’ll need to save money to make this lump-sum payment. The down payment is a critical part of your overall home buying budget.
Revisit The Terms Of Your Student Loans
If your student loans have high interest rates, your loans will cost more over time. Paying down more of your higher-interest loans before you invest in a home can help you save money on interest in the long run.
Revisit the terms of your student loan repayment plan and compare your monthly payments to your accruing interest. If your payments are low but don’t cover the interest you accrue every month, you’re sliding deeper into debt. In a situation like this, one approach may be to pay more than your minimum and focus on paying off your student loans before taking on mortgage debt.
Also, keep in mind that even loans in deferment or forbearance can be calculated into your debt. Your lender will still look at these loans as if there is a required a payment. If you’re on an income based repayment plan, you should discuss it with your lender to determine how this would impact your DTI.
