Do Student Loan Borrowers Miss Out on Real Estate Investments? Here’s What Experts Say
Written by
Megan Mostyn-Brown
Edited by
Chris Cluff
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
According to the Education Data Initiative, it takes the average borrower 20 years to pay off student loans. Being strapped with this kind of long-term debt can make investing in your future — like settling down and buying a home — seem like a no-go until the loan is paid off. But while investing in real estate isn’t easy for borrowers, it also isn’t impossible.
We consulted with two experts to find out what hurdles borrowers should be aware of and how to overcome them.
Potential Hurdles
Debt-to-Income Ratio
According to the Consumer Financial Protection Bureau, your debt-to-income ratio (DTI) is your total amount of debt divided by your gross income. Mortgage brokers use this number to determine whether you qualify for a home loan.
Lenka Fridrich, owner of Italica Homes, warned that “a high DTI ratio might signal to lenders that you are overextended, and they might be less willing to lend to you.”
Qualifying for a Mortgage
Lenders don’t just look at your DTI. According to Seth Jacobs, mortgage broker and founder of Maine USDA Home Loans, they also look at loan repayments as well as your credit score. If you’ve missed payments on your loan, have a bad credit score or your debt is extremely high, you may end up not qualifying for a mortgage.
Affordability
Jacobs also warned that affordability can be a hurdle for those strapped with student loan debt. Typically homeowners put down 20%. With the average home price at $348,853, that means you’ll need to put down around $69,770. Using this same model, your mortgage for a 30-year fixed mortgage rate hovering just above 7% would be around $2,000 a month.
Oftentimes, those strapped with student loans don’t have the cash to balance paying loans, a down payment and a mortgage without going further into debt.
Preparing Yourself
Assess Your Finances
Fridrich advised that you make sure you have a solid emergency fund and can comfortably pay your monthly student loan payments. The last thing you want is to end up draining your savings in order to pay both a mortgage and your loan.
“If investing in real estate will stretch your budget too thin,” she said, “it might be wise to wait.”
Pay Off High-Interest Debt
While paying off your entire student loan may be impossible, Jacobs suggested paying off any high-interest debt — debt that has an interest rate of 6% or higher.
“Reducing high-interest debt will improve your financial health and increase your chances of getting approved for a mortgage,” he said.
Explore Loan Forgiveness Programs
Both Fridrich and Jacobs think it’s a great idea to investigate whether you qualify for one of the many student loan forgiveness programs. Many career paths, like teachers and firefighters, qualify borrowers for loan cancellation after only five years of service.
If your job doesn’t qualify you for full debt forgiveness, there are other options. Jacobs specifically suggested exploring an income-driven repayment plan (IDR), which bases your monthly payment on your family size and discretionary income. If your situation warrants it, you could end up paying less monthly for your student loan, which in turn could free up money to pay a mortgage.
Improve Your Credit Score
If you don’t qualify for loan forgiveness or can’t pay off high-interest debt, make sure you have a good credit score. Jacobs noted that this was vital for getting a mortgage. He suggested that prospective homebuyers “make timely payments on all debts, including student loans, to boost your credit score and enhance your borrowing prospects.”
Consult With Professionals
If you’re nervous about your financial situation or overwhelmed by the real estate market, don’t be afraid to ask for help. Fridrich encouraged potential homebuyers to consult with a financial planner or a mortgage broker before looking for a house. They’ll consider your income, debt and credit score to help you create a tailored financial plan moving forward.
More From GOBankingRates
