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Should I Pay Off Student Loans or Buy a House?

Consider whether it makes more financial sense to pay off student debt or buy a house when determining which is the best option for you.

If you’ve been out of school for a little while you might be considering buying a house.

If you still have student loans to pay off, however, they may prevent you from achieving your goal of living in your own home.

According to our data, fresh graduates will be the second sector to have more than $200K in federal student debt in 2021.

Each case is unique, so we seek the borrowers to tell us what they think they can accomplish
Jay Dace

In this post, we’ll explore the reasons for paying off your student loans before & after buying a house.

5 Reasons Why It’s Important to Pay Off Your Student Loans Before You Buy a House

1. You Don’t Have Enough Cash Set Aside for a Down Payment

According to many financial experts, a 20% down payment is required on homes.

However, down payments are not always necessary for homebuyers.

People with higher credit scores, for example, may be eligible to pay as little as a 3.5% down payment on an FHA loan.

Although getting a loan with a low-down payment is doable, if your down payment is less than 20%, you’ll almost certainly be required to purchase private mortgage insurance, which can raise your monthly mortgage payments by 0.15% to 1.95 percent.

For instance, If you spend $100,000 on a property and opt for private mortgage insurance, you might end up spending as much as $12.50 to $162.50 every month in addition to your mortgage payment.

2. Your Debt-to-Income Ratio Is Dangerously High

Lenders examine how much of your monthly income is dedicated to debt repayment (such as payments for student loans and credit card debts), when they determine whether you qualify for a mortgage.

The result is your debt-to-income ratio (DTI), which is further divided into front-end and back-end debt-to-income ratios.

  • The back-end ratio is the percentage of your income consumed by any debt, including housing.
  • The front-end ratio is the proportion of your income spent on housing payments, including mortgage or rent costs and property taxes.

Most lenders want potential homeowners to maintain a front-end ratio of no more than 28% and a back-end no higher than 36%

Note: Back-end ratios as high as 43% are permitted by some lenders, but this does not imply you should take on a loan that makes your DTI reach its theoretical maximum.

Keep in mind that just because you meet the requirements for a loan does not imply you should accept one.

How to Reduce Your Debt-to-Income Ratio

You can reduce your DTI by reducing your student loan payments.

You may lower your total amount owed by refinancing your debt at a cheaper monthly payment, which improves the proportion of your income spent on obligations versus earnings.

You can also reduce your overall outstanding debt by enrolling in income-driven repayment (IDR) for federal student loans.

Keep in mind that when calculating the back-end DTI, your entire student loan debt may be utilized.

You may also like: 6 Ways To Solve Student Debt Crisis In 2022

3. You Don’t Want To Have a Poor House

It is not enough to pay a mortgage every month to become a homeowner.

It also includes recurring costs that renters don’t have to worry about.

There are regular upkeep expenditures, but there are also emergency repairs.

What if the roof begins to leak, the heating unit fails, or the deck needs to be rebuilt?

If these additional expenditures occur, make sure you have enough funds in your budget to cover them.

The greatest approach to fulfill this demand is to buy a house for less than the cost at which you can acquire a mortgage.

You may also like: How to Pay Off 200k in Student Loans

4. Renting Isn’t Always a Bad Idea

When it comes to renting, some people believe you’re throwing money away, but there’s no need to make a decision right away.

If your finances are out of control or you’re not sure about your long-term goals, renting to wait until you have more security and clarity is perfectly acceptable.

Meanwhile, you may focus on reducing your student debt.

5. You Don’t Have an Idea Where You Want to Be in the Next Decade

Renting allows you to move from one job to the next at any time. This sort of freedom is severely limited when it comes to homeownership.

If you’re going to move soon, the transaction costs of buying and selling would outweigh any short-term benefits

Dacey, the veteran loan officer.

You may always sell your property, but it comes with a lot of risks, hassles, and transaction costs.

You may also rent out your property, but you may not want to be a landlord.

If your employment is unsteady, you’re considering a major career or lifestyle change, or you’re not sure where you’ll be in the next few years, it’s better to put off buying a home.

You may also like: Can I Refinance Student Loans During My Grace Period?

Bonus: Consider Refinancing? Here are The Best Lenders in 2022

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6 Reasons Why It’s Important to Not Pay Off Your Student Loans Before You Buy a House

1. You Have a Student Loan with a Low-Interest Rate

Student loans are, by far, the safest type of debt in comparison to credit card debt and automobile loans.

The majority of student loan interest rates are lower, and the loans generally have a longer repayment period.

Unsecured student loans are also less expensive than secured loans since you don’t have to put up your home or car as collateral if you default.

For example, it’s good to aim to pay off $10,000 in credit card debt as quickly as feasible, but owing $10,000 in student loan debt at a low monthly payment amount may not seem so awful if you can use the cash to buy a home.

2. You Need More Room at Home for Family and Career

Being financially prepared to return home may also be beneficial for personal reasons.

If you’re considering adding to your family, the extra room that a home provides might be required.

Maybe you’re a single person or a couple and just want more space, maybe to work remotely from home.

If you’re not able to make your mortgage payment, consider taking on a roomie or two to assist with the bill so you can spend that extra money towards paying down your student loans and achieving other financial objectives.

You may also like: Can Student Loan Debt Be Discharged By Declaring Bankruptcy?

3. Your Debt-to-Income Ratio Is Significantly Low

If your front-end DTI is below 28%, it’s a positive indication that you’re ready to commit to a mortgage while still repaying your student loans.

4. You Could Use Your Money Smartly

Apart from the prospect of growth in equity, buying rather than renting may save you money.

In some areas, the cost of renting is greater than that of purchasing

Dacey

Depending on the market in your region, a larger home for the same monthly payments as a smaller or less-updated rental property might be available.

You may also like: 3 Solutions To Refinance Student Loans with Bad Credit

5. You’ve Saved Up a Sizable Down Payment or Emergency Fund

Take a look at your cash before you start selecting which homes to visit.

If you don’t have enough for a %5 to %10 down payment or enough as an emergency fund for home expenses. Take more time to save money for your first house.

6. You Have Enough Funds to Pay for Home Ownership Expenses

Purchasing a home makes sense if you can handle the monthly debt and other associated expenses of home ownership.

You may also like: How To Get Car Loans For College Students

Should You Pay Off Student Loans Before Buying a House?

There is no black-and-white solution.

There are compelling arguments for both buying and waiting, depending on your situation.

Consider whether it makes more financial sense to pay off student debt or buy a house when determining which is the best option for you.

You may pursue both objectives at the same time by utilizing the following tactics:

  • While putting away a substantial sum for a down payment, don’t forget about other savings goals like retirement or your children’s future college expenses.
  • If you have good credit and a trustworthy cosigner, student loan refinancing may lower your student debt’s interest rates.
  • To tackle higher-interest debt first, follow the debt avalanche strategy.
  • To enhance your DTI even more, raise your income as much as feasible.

Frequently Asked Questions

  1. Is it necessary to pay off my student loan before purchasing a home?

    Student loan debt does not generally prevent you from obtaining a mortgage.

    The most significant distinction to remember is that student loan debt lowers your debt-to-income ratio, which is something lenders consider before offering you a loan.

  2. Is it better to pay off my student loans in one large payment?

    Depending on the duration of your loan, putting a lump sum towards it will lower the amount of interest you pay over time because the loan's life will be shorter.

    Paying more than the minimum payment reduces both the borrower's and lender's interests in the long run.

  3. Is it possible to get a mortgage if your student loans are deferred?

    Depending on your situation and the reason for your student debt deferrals, you may not be required to make loan payments for years.

    Even though you are not making monthly payments, your student debts will appear on your mortgage application even if they aren't.