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What to know about buying a house while you have student loan debt

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DISCLAIMER: As the COVID-19 public health situation evolves, new regulations are being continually issued. This page/story/information may not include the most recent information.Tanisha A. Sykes Special to USA TODAY 

One of the most important factors that lenders consider when evaluating you for a mortgage is your debt, including any student loans you must pay back.

“Student loans can affect a consumer’s ability to get a mortgage because they are a liability that factors into your debt-to-income ratio,” says Adam Selita, CEO and co-founder of The Debt Relief Company in New York City.

If your debt-to-income ratio — all of your monthly debts payments divided by your gross monthly income — is too high, it can be difficult to qualify for a mortgage.

“Your DTI is a key qualifier on mortgage loans nationwide because it’s a measure of risk and an ability to repay your loan,” explains Chris Kemp, Vice President of Sales, Flagstar Bank Home Lending in Michigan. “A good DTI to get approved for is 36%.” Always check with your lender, but “the lower the number the better for you,” he says.

Katherine Ryckman, 29, and her husband, Michael, kept this in mind as they worked through the home buying process last year.

“I had almost $14,000 in undergraduate student loan debt,” says Katherine, a technical writer, who got married in July 2019. “My husband came into our marriage without any student loan debt.”

The Hawaii-based couple stayed with his parents for a few months after they wed to pay off “wedding debt and credit cards,” she says. And her student loans?

“Our plan was to start paying off my student loan debt after we moved into our new townhouse in February, but during the home-buying process, we made on-time consistent payments.” Now that they’re settled into their new home. they’ve been slowly ticking off the debt, and have a little less than $9,000 to pay off.

While you don’t have to be completely debt-free prior to purchasing, consider these tips when buying a house with student loans in tow.

Get your finances straight

It’s common for borrowers to have student loans and other debts going into the

home-buying process, so don’t let that deter you. Well before you hire a realtor or start looking at houses, prepare financially with these strategies from Kemp:

•    Be sure all of your monthly payments are made on time, and “never be more than 30 days late,” says Kemp.

•    “Provide evidence of a timely payment history on your debts,” he says. Keep a copy of your current credit report on hand and ask creditors for a letter that lists payments made and confirms they were paid on time.

•    Finally, Kemp suggests scheduling a mortgage analysis with a lender to assess your creditworthiness and ability to qualify.

Understand your credit report

Student loans can impact a consumer’s creditworthiness via reported payment history and length of time accounts have been established, says Selita. “Newer student loans will be worse for your credit,” he says, “while those that have established for some time and are nearly paid off will have a positive impact on your credit.”

Pay down debt

The Ryckmans chose to shed personal debt instead of student loan debt prior to purchasing a home. But Shang Saavedra, a personal finance expert at SaveMyCents.com, says, “it’s a good idea to pay down student loan debt, especially if doing so qualifies you for a better mortgage.”

Saavedra recommends pausing expensive purchases, taking on roommates, or cooking more at home, then applying the extra cash to the “student loans with the highest interest rate or those with the largest balances.”

Eliminate some loans early

If student loans prevent you from achieving a qualifying debt-to-income ratio, try paying off some student loans early.

“The key is to pay each account in full, one by one, so that the monthly expenditure is not impacting your DTI,” says Selita. “Making minimum payments on each account is not a solution.”

Start saving the down payment

As you pay down or pay off debt, make sure to have “seasoned funds” in your account for the down payment.

“A down payment of 20% is ideal to avoid paying private mortgage insurance and to start your home purchase out with a good loan-to-value ratio of 80%,” says Selita. “This will also help you to qualify for the mortgage and keep your DTI at a favorable percentage.”

A game plan for the remaining debt

Once you purchase the home, decide how you’re going to pay off the remaining student loans.

“I recommend getting on a budget if they’re not already on one and then sticking to it initially for three months,” says homeowner Katherine. “Any extra money they can squeeze out of the budget should be thrown at their debt.”

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Michigan license number:   DM-0016282 Available to the public and licensed in Michigan.

Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

(6) A licensee shall not contract for, receive, or charge a debtor an amount greater than authorized by this act. A person that violates this subsection, except as the result of an inadvertent clerical or computer error, shall return to the debtor the amount of the payments received from or on behalf of the debtor and not distributed to creditors, and, as a penalty, an amount equal to the amount overcharged.

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