Add all your monthly recurring expenses, then divide the number you get by your total pre-tax monthly income. Is someone else applying for your mortgage loan with you? If so, include their income in your calculation as well. Multiply the number you get by 100 to get your DTI ratio as a percentage.
DTI Example
Let’s take a look at an example. Imagine that you have a total monthly gross income of $4,000. Say that you have the following monthly debts:
- Rent: $500
- Student loan minimum payment: $150
- Auto loan minimum payment: $250
- Credit card minimum payment: $100
In this example, you’d first add up all of your debts for a total of $1,000. Then divide $1,000 by your total gross income, $4,000. Your DTI ratio is 0.25, or 25%.
Take a look at how your current student loan debt compares to your overall income. Though the specific DTI ratio you need for a loan depends on your loan type, most lenders like to see DTI ratios of 50% or lower. You may need to work on reducing your debt before you buy a home if your DTI ratio is higher than 50%.
Great news! Rates are still low in 2022.
So, should you pay off your student loans before you buy a home? First, take a look at your DTI ratio. Lenders care less about the dollar amount of debt that you have and more about how that debt compares to your total income. You can still buy a home with student debt if you have a solid, reliable income and a handle on your payments. However, unreliable income or payments ount of your total monthly budget, and you might have trouble finding a loan. Focus on paying down your loans before you buy a home if your DTI is more than 50%.
Look at other areas of your finances before you consider homeownership. You may want to hold off until you build up some savings if you have a reasonable DTI ratio but you don’t have an emergency fund. In the same vein, if your student loan payment is standing in the way of retirement contributions, wait to buy a home until you pay down more of your debt. Also bear in mind that most mortgages require a down payment when you purchase a home. This lump sum should also be considered in the overall total as well.
Finally, look at your interest rate. If you have a high interest rate on your student loans, your loans will cost more over time. Paying down more of your higher-interest loans before you invest in a home allows you to reduce what you pay in interest. Also, take a look at your repayment plan and compare your monthly payments to your accruing interest. If your payments are low but you aren’t paying off enough to cover your accruing interest every month, you’re actually going deeper into debt. In this situation, you should pay more than your minimum and focus on paying off your loans first before you take on more debt with a mortgage.
However, now is likely a good time to buy a home if you have online payday loans North Dakota an emergency fund, your DTI is low, or you’re contributing to your retirement and you’re on a solid student loan repayment plan.
Qualifying For A Mortgage And Buying A House With Student Loans
Set on buying a home even though you have student loans? Here are a few steps that you can take to improve your chances of qualifying.
