In recent years, about one-third of American homebuyers have been 34 and younger. If you’re in that age bracket, you may wonder how these buyers navigated the intricate mortgage process, especially if they also have student loans and other existing debts. Let’s clarify it a bit – first in the context of borrowing in addition to your student loans and other existing debts, then with tips for the lending process, itself.
Student Loans Shouldn’t Kill Your Dreams of Home Ownership
Carrying student loan debt? You’re not alone. The average student loan debt by 56 percent from 2004 to 2014, and nearly 70 percent of students graduated with an average loan debt of $28,950.
When it comes to mortgages, in addition to your outstanding debt, it is important that you can afford the estimated payment and that you have saved enough for a down payment. So don’t be discouraged if you have student loan debt, home ownership could still potentially be within reach.
Student loan debt gets factored into your debt ratio, which banks and lenders use to determine eligibility when issuing standard mortgages, according to Douglas Boneparth, CFP with Longwave Financial in New York.
“When it comes to student loans and other debts, lenders typically want liabilities to total no more than 36 percent of pre-tax income,” says Boneparth.
“The standard rule is your monthly mortgage payment, which includes principal, interest, taxes and insurance, should not cut into more than 28 percent of your income before taxes.”
Feeling more comfortable with the idea of affording a home even while paying off student loans? Let’s turn our attention to the actual lending process.
How to Make the Most of the Mortgage Application Process
What’s often most daunting about buying a home for the first time is the lending process. Follow the tips below and you can do very well, even as a new homeowner.
If you can help it, try not to change jobs or apply for new credit in the months before applying for a mortgage.
First time homebuyers are not experienced so many times they make the mistake of changing jobs or processing a car loan while they undergo the mortgage application process without telling the lender, which can cause last minute problems.
Determine Your Maximum Monthly Payment
This is all about understanding what you can afford. In addition to building savings for a larger down payment, consider the amount you are most comfortable paying per month toward a mortgage. And remember – you’re likely to have new and sometimes unexpected expenses as a homeowner.
Ask yourself how much house you need based on current living accommodations. Boneparth suggests asking yourself, “Could I pay the rent for a larger apartment today and feel comfortable, or would I have to cut on spending in another category?”
Get Your Documents in Order
It’s time to organize your pay stubs for the last 30 days, your bank statements for the last two months, and both your tax returns and W-2 forms for the last two years.
Get Pre-Approved and Ask About Upfront Fees
Now that you’re clear on how much house you can afford, you’re ready to get pre-approved for a mortgage. Ask your bank or lender to pre-underwrite your income, assets and liabilities to help you determine how large a loan you’ll qualify for. “This will ensure that a mortgage staffer will review your application documents and not just take the income that you stated to make a pre-qualification or pre-approval,” says Matt Hackett, operations manager with Equity Now, a direct mortgage lender.
Also consider requesting information about upfront fees before applying for a loan so you’re not surprised later. The only fee you should pay out of pocket during the loan application process is the appraisal, which varies by geography. Expect to pay in the range of $300 to $600 dollars.
Decide on a Long or Short-Term Mortgage
Prepare yourself for the home-buying process by deciding whether you’re setting down long-term roots or are buying this home as a starter.
If it’s likely to be more temporary, consider an Adjustable Rate Mortgage (ARM), which has a fixed interest rate for a period of time (5 years, 7 years, 10 years) and them adjusts yearly thereafter. For a long-term home, however, a 30-year fixed rate loan might make more sense.
Apply for a Mortgage Loan
After you submit your application for a mortgage, request a formal Loan Estimate from the lender or banker. An email with an estimate isn’t enough.
“An official loan estimate is important. In some cases your data is processed without being treated as an application because they don’t want you to shop around for the best rate,” says Hackett.
A Loan Estimate defines the terms of your rate, the fees and type of loan you’re securing. “The loan estimate is only provided after making an application, it is not provided at pre-qualification or pre-approval, which take place before a property is located to be purchased,” Hackett says.
Understand the Timeline
Request a timeline with a listing of deadlines that all parties must adhere to for the filing of documents, such as the mortgage commitment and closing date.
“There’s a schedule of timelines in a purchase contract that have been laid out, so make sure the bank or lender you’re working with is aware of those and can meet them. Otherwise you could be subject to penalties or even lose the contract,” Hackett says.
The benefit of owning a home is the ability to build equity in it over time but this will require care and attention to detail. Be prepared to preserve and add value to your important investment!