Should You Buy a Home When You Have Student Loans?

Should You Buy a Home When You Have Student Loans?

As the millennial generation matures into their twenties, many will begin thinking about purchasing a home and starting a family. However, today’s 20-somethings have the additional challenge of significant student loan debt. With the average student loan debt increasing by over 60% since 2012, student loan debt has become an increasingly troublesome concern for millennials looking to join the ranks of homeowners.

Deciding whether to buy or continue renting can be complicated. The two most basic questions for millennials with student loans are: Can I afford to buy a home? And, if I can, should I?

Can I buy a home when I have student loan debt?

Because of growing student loan debt, there has been an increase in programs to help people with student debt become homeowners. Such programs include:

  • Reductions in monthly student loan payments
  • Changes in the way student loan payments are counted in debt to income calculations
  • Reduction of cash-out fees to pay down student loan debts through a real estate transaction
  • Removal of debts payed by another person (like Mom and Dad) from debt to income calculations

Before ruling out the possibility of purchasing a home, check with a loan professional to see what the latest changes effecting student loans are. Purchasing may not be as out of reach as you thought.

Should I buy a home when I have student debt?

Determining if you can purchase a home is only a piece of the puzzle. The next, and often more ambiguous part to consider is if you should. There are many factors to consider when answering this question, such as:

  • Is your debt-to-income ratio too high? Even if you can qualify for a home loan with your current debt to income ratio, it is important to consider the lifestyle that you will be able to afford once you purchase a new home. If the ratio is too high, you may find yourself living off of Top Ramen.
  • Do you have a down payment? While there are often programs available to purchase a home with little or nothing down, purchasing a home with less than 20% down both increases your monthly payments and adds the additional cost of mortgage insurance to your monthly expenditures. These are important considerations when forecasting your monthly budget and discretionary funds.
  • Do you plan to stay in the same area for at least 5-10 years? Because of the sizeable costs to purchase a home and the impact of appreciation, the longer you plan to stay in your home, generally, the more financial benefit you stand to gain. Moving frequently can rack up many additional expenses, substantially diminish the financial benefits of home ownership and make it more difficult to be mobile and take advantage of opportunities in other areas quickly.

Still unsure of which way to go? Here’s a great tool Buy or Rent from the New York Times that can help you decide.

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