Student loan debt is a fact of financial life in the U.S.—the latest statistics show us that 45 million Americans have student loan debt, totaling $1.56 trillion, with an average debt of $32,731 per person.
That kind of debt can derail financial health and dreams for decades. According to the National Association of Realtors, 83% of non-homeowners say that student loan debt prevents them from buying a home.
But it doesn't have to. However, there are a few things to consider to determine your next steps when you're trying to buy a home when you still have student debt.
Know Your Debt to Income Ratio
Your student loans impact what's called your DTI, or debt-to-income ratio. Debt includes student loans, credit card balances, car loans, or medical debt, and you can calculate your DTI by adding up your total monthly debt payments and finding out what percent of your total monthly income that is.
If you have more than a 43% debt to income ratio, you'll want to focus first on paying down some of your student loan debt first.
However, lenders care less about the amount of debt you have vs. how that compares to your total income. So, if you have student loan debt but have a well-paying, reliable job, lenders will consider that as they calculate your eligibility.
Change Your Debt to Income Ratio
You might not be able to tackle all of your student loan debt, but consider paying off or paying down other (especially high-interest) loans to help shift your DTI. For example, work to pay off a credit card balance by shifting as much money to it as possible—not only will this help your DTI, but you'll be paying down a debt that continues to grow quickly due to higher interest rates.
Another way to change your DTI is to up your income. So if that means taking an extra shift each week, creating a side-hustle like dog-sitting, or asking for a promotion, the extra income will positively impact your DTI.
Consider Alternative Loans
If your DTI is 50% or greater, you won't qualify for a conventional loan, but a skilled personal banker or mortgage officer can help you investigate alternatives that can help get you a loan that works for your situation. For example, FHA (Federal Housing Authority) loans are loans from local mortgage companies, banks, or credit unions that are insured by the Federal Housing Authority and are less risky for lenders to give to first-time buyers or those with less-than-perfect credit or DTI.
At Citizens Bank, our mortgage and banking professionals take pride in getting to know our clients personally and helping them tailor financial strategies and products to help achieve their financial dreams. Talk to one of our experts to get started!