Q: I’m a full time student who’s about to graduate this year. My plans are to hopefully begin the process of buying a home 6 months after I start working. How will my student loans affect my ability to qualify for a mortgage loan?
I expect to have $100,000 in student loans. Also I should have started repaying these loans at the same time I’m trying to qualify for a mortgage?
A: Like so many students, you’re graduating with what amounts to a mortgage on your education. In fact, some people have home loans this big!
The monthly payment for your loans (referred to as the “debt service”) will be subtracted from the total amount you can use to pay for your mortgage, real estate taxes, homeowners’ insurance and total debt.
Lenders will commonly allow you to use up to 28 percent of your total gross monthly income for your mortgage, real estate taxes and homeowners’ insurance payments. You will be able to spend up to 36 percent of your gross monthly income on your total debt. If you get an FHA loan (as opposed to a conventional loan), you’ll be able to stretch those debt-to-income ratios a little higher.
It’s possible that with your student loan monthly payments, you may not be able to afford to buy anything until you’ve paid down those loans significantly. If your income is high enough, you may be able to afford to buy even while you begin repayment.
I’d take the safe road: Don’t begin to even look for a home until you know how much you’ll be making, and what kind of a bite your debts will take out of that monthly income. And remember — if you spend 43 percent of your gross monthly income on your mortgage, taxes, insurance and student loans, it can eat up as much as 65 percent of your take-home pay, leaving little for everything else in your life.
For more help calculating these costs, please read my book: 100 Questions Every First-Time Home Buyer Should Ask (3rd edition) to help you get started (it’s available in most local libraries).
Jan. 19, 2009.