Should I pay off student loans before buying my first home?

The pros and cons of buying your first home with student loan debt

Do I need to pay off my student loans before buying my first home? It’s a common question, but unfortunately, not an easy one to answer. The truth is, every situation is different.

What it really comes down to is whether or not you feel comfortable paying a mortgage (and all the other fun expenses that come with having a home), while also paying off student loans. 

Are you still scratching your head wondering what to do? Here are a few reasons why you should go ahead and buy, and a few reasons why you should probably wait.

Here’s Why You Should Buy

1. You Don’t Need As Big Of A Down Payment As You Think

Gone are the days when you had to put 20% down to get approved for a loan to purchase a home. Now, there are more realistic options. For example, a conventional loan lets you put as little as 3% down. An FHA loan requires as little as 3.5% down. With these rates, it’s a bit easier to save a down payment, while still paying down debt. 

2. You Can Always Defer Payments

One good thing about student loans is they typically don’t have as high of an interest rate as other loans. Meaning, you can take longer to pay down your debt (without accumulating a great deal of interest) than you would with credit card debt. Not to mention, student loans are unsecured. This means you can defer payments, if needed, without worrying the government will take away your possessions.

3. You Make Enough Money To Have It All!

Contrary to popular belief, not every millennial is struggling with their finances. If you’re able to afford a monthly mortgage, your student loan bill, and anything else you might need to survive, why not purchase a home? Having student debt shouldn’t stop you from buying, just as long as your wallet is in good condition.

Here’s Why You Should Pay Student Loans First

1. You Don’t Have Good Credit

With conventional loans and FHA loans, you have the option to put anywhere between 3-3.5% down. But here’s the thing, to be approved your credit needs to be in good shape. While student loan debt isn’t the biggest factor in determining a credit score, it’s still something lenders look at. If your credit isn’t good, lenders are less likely to lend you money.

2. Your Debt-To-Income Ratio Is High

How much money do you make in a month? How much of that money do you use to pay off debt? If a majority of your monthly income goes to debt, your debt-to-income ratio (DTI) is too high and most lenders will only approve those with low DTI’s (around 43%). Instead of buying a house, it’s a good idea to focus on lowering your DTI. 

3. You Don’t Have An Emergency Fund

If you don’t have an emergency fund (or hefty savings account), you shouldn’t buy a house with student loan debt. Even with a low down payment, you’re going to need money. With closing costs, insurance, furniture, etc. buying a home is expensive. And so is owning a home. What if your dishwasher breaks? You want to be able to handle these expenses as they come. To do that, you need to have money set aside. 

Moral of the story: Take a good look at your finances before packing your bags and buying your first-home.

3d rendering of a row of luxury townhouses along a street

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