Don't Let Student Debt Hamper Your Home-Buying Experience

We have all read the harrowing statistics about student loan debt. College grads enter the real world with an average of $34,000 in student loan debt. According to the Economic Policy Institute, the unemployment rate for recent graduates is 8.5%, and 16.8% are underemployed. With all these gloomy statistics, how can a debt-riddled Gen Y consumer even consider buying a home?

Cheer up, Millennials! There is hope. Check out these tips to help you to qualify for a home loan:

1)  Grow Your Credit Score
The best way to build a strong credit score is to pay your bills on time. If you have credit cards, keep a low balance. Try not to exceed 30% of your limit. It actually helps to maintain some credit card debt, if you want to improve your credit rating. Therefore, you may not want to pay off all your cards at once. Instead, keep an affordable balance, with manageable payments. Lenders often view this as "healthy debt."

You should also beef up your credit file. Having no credit score is sometimes worse than having a weak score. Avoid the "thin file" -- someone with no or very few items on their credit record. Some lenders offer "credit builder" loans specifically designed to help young consumers to build credit. Whatever lending options you choose, make sure you maintain a reasonable, affordable balance.  Also remember to check your score. Several agencies provide free credit reports. It helps to know how you rank with the credit bureaus. 

2)  The Debt-to-Income(DTI) Balancing Act
Lenders not only look at credit score — they pay close attention to the debt-to-income ratio, which compares your overall debt to your income. You should shoot for the lowest possible DTI ratio. If it is over 50%, you are carrying too much debt. If you have a high DTI ratio and can only make minimum payments, then lenders will hesitate to approve a loan that you may not be able to afford.

The best way to improve your DTI ratio is obvious— increase your income. Easier said than done, right? If you have a tough time making ends meet with your current salary, put in some overtime, take a part-time job or try to put your hobby to good use. Can you play an instrument? Maybe you can give guitar lessons. Of course, you can also ask for a raise, depending on your standing with the company.

The next best way to reduce the DTI ratio is to pay down your debt. If you apply a larger chunk of your income toward your debt, your credit rating will take a temporary hit. However, once your DTI ratio improves, your rating will sparkle, as well.

3) Consider Student Loan Payment Options
If your student loan payment still weighs you down, you may consider some alternatives. It may be possible refinance or consolidate your student loans. In addition, if you have federal student loans you may qualify for an income based repayment program. 

4) Pay Yourself
As you begin to control your debt, you will see your financial cushion grow. Start paying yourself. Determine how much you can reasonably save out of every paycheck -- and do not touch that money. As your savings grows, you might consider plunking it into Certificate of Deposit, which earn a greater return than a standard savings account.

5) Get Pre-Approved
As your savings account flourishes, visit your local AltaOne location and ask about a pre-approval. Pre-approvals help in several ways. You learn how much the financial institution is willing to lend, and you educate yourself on closing costs, down payments and other aspects of the home-buying process.

6) Patience, Patience, Patience
Life is a marathon, not a sprint. A house is likely the most significant purchase you make throughout your life. The responsibility of mortgage payments requires financial preparation and maturity. 

Good luck—and happy house hunting.

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