If you are a recent grade, it’s going to come as no surprise to you that experts say the average 2017 college graduate has student debt in the range of 38k. Some even have more, depending on where they went to school and what their major was. But with entry level salaries not raising for more than 10 years, and the price of most things only increasing year by year with inflation these recent grads are between a rock and a hard place. When you hit the time you’ve realized you want a mortgage, that heavy student debt you’re carrying can be a huge concern. While the situation is not perfect, there are people just like you that do obtain mortgages for homes they are quite happy at. So let’s take a look at some of your options:
Understand the formula of DTI: this is what lenders look at. They want to know your Debt to Income ratio. How much you owe vs. how much you earn. While this can truly make you squirm in your seat if you’re carrying student debt – consider the lender’s point of view. If you’re going to lend someone 100K or more, then you simply want to feel confident that they can pay it back. When their debts are higher or quite close to what they are earning, you’re obviously going to question how they would be able to pay yet another debt. So the first thing you need to do is to look at your finances the exact way a lender is. Sit down with your budget and know what is coming in and what goes out. What are your monthly expected debts, such as student loans, credit cards and car payments – the ones you can always know will be there? What other bills do you often pay each month? Look at your finances over at least the past 12 months. If you are a couple and have done your finances separately, then start by looking at them separately and bring them together for a conversation.
Learn to improve your credit score. When you are approved for a mortgage, the rate you are given is quite dependent on your credit score. Now is the time to obtain your free credit report, that you can request each year. Get the credit score and look at the report. Check it over both for any errors and to see if you owe any creditors money. If you owe anyone money, contact them now to work out a repayment plan. Paying off bills and them reporting this will greatly improve your credit score. Make it a regular routine from now on to pay all of your bills early or on time – as this will make a huge difference in your credit score overall. We highly recommend you get your credit score the very moment you are starting to think about getting a mortgage so you can fix any mistakes.
Pay your rent on time. Now most of us have to do this, or we risk eviction so you’re probably already doing this. Get your rent statements that show you are paying rent on time and keep them handy. You will need them when you apply for a mortgage. The simple fact that you’ve been paying your rent on time works greatly in your favor. A mortgage lender if going to look quite favorably upon your on time record for these payments. So save these documents for your application.
Look hard at what type of home you can afford. It can be very easy to fall in love with that sweet Victorian house close to the beach, but if you’re fresh out of college it’s probably out of your price range. Do you really know what’s in your price range? Try talking to a real estate agent you know, if you start asking family and friends there is probably one who is a friend of a friend. They can give you some recommendations on what you could look for. Consider what your home needs are. Perhaps you want something close to public transportation because you don’t have a car. Or you want something near the schools because you’re expecting a baby. Or you want a home with space for a home office because you work from home or telecommute part of the week. Go with your top 3 needs and look for those. Everything else is a nice “extra” if you can find it.
Think long term about a mortgage. One thing recent grads should understand is that the whole process for applying for a mortgage typically takes longer than you expect it to. Have the plan to find a place to rent in the location you want to live, if you are moving to a new area. You never want to rush into a mortgage! Get a few choices of mortgage lenders to approach because remember, one could say “No” but another could say “Yes.” They all have their own ways of determining who to select.