Buying a house is a major milestone of adulthood. However, many first-time homebuyers are finding that milestone is harder to reach because they are saddled with school loans. According to the National Association of Realtors, 57 percent of first-time homebuyers who found saving a down payment difficult put the blame squarely on their student debt. And that's just people who were able to purchase a home –it's likely that heavy student debts have prevented many more would-be homebuyers from achieving that goal.
If you are among those who want to buy that first home but are encumbered by too much tuition debt, there are ways to deal with it. Here are several strategies that might help you make the leap to home ownership.
If student loan payments have you feeling the pinch every month, you can consolidate your loans to reduce your monthly payment. A single payment can simplify your debt management and lower your monthly payment, allowing you to direct more funds toward your down payment. While federal loan consolidation doesn't reduce your interest rate (the new rate is simply a weighted average of all your federal loans), you may be able to choose a longer repayment period or an income-based repayment plan.
Here are some things to consider before you jump on board with loan consolidation.
- Lowering your monthly payment often means extending the life of your loan, typically to 30 years. This can increase the total interest expense.
- If you are relying on benefits such as debt forgiveness or principle rebates, make sure you read the terms carefully and confirm your benefit status before you consolidate. You don't want to lose those benefits.
- Consolidated loans are fixed-rate loans. In some situations, this can be more favorable than an adjustable-rate loan. Shop around to find the best rate and terms.
2. Pay Down Early
Another plan of attack is to pre-pay your loans, directing as much income as you can toward zeroing out your student debt. Even putting an extra $50 or $100 a month toward your loan can add up to a significant savings. If you get a bonus check at work, skim a little off the top for a nice dinner out and dump the rest into your loan.
This is the opposite of the previous strategy. The first tip accomplishes your goal by reducing your student loan payment so that you can save a down payment and qualify for a mortgage. This one involves getting rid of the student loan altogether before attempting to buy a home. While this strategy takes longer, getting student loans off your personal balance sheet faster can save you thousands of dollars in interest payments.
3. Make It Automatic
One key to paying off your student debt on time or early is to make it painless by automating it. Set up direct payment right out of your paycheck, so you never even see the money in your bank account.
Once your loans are paid off, keep up the habit. Redirect that money into a savings account for your down payment. Again, make it automatic to make sure your saving stays on track. You'll never miss what you don't see.
4. Do Nothing
You don't have to refinance or pay more each month as long as you do one simple thing -- never miss a payment on your loan. Delinquent payments and loan deferrals can have a disastrous effect on your ability to borrow for a home down the road.
Student Loans Can Help Buy a House
Student loans aren't all bad news. In some ways, they can actually help first-time home buyers -- that is, if payments are made on time. The reason that delinquent payments or loan deferrals are disastrous is that they significantly lower your credit score. And your credit score determines what you'll pay for mortgage financing, or if you can get approved for a loan at all.
Just as delinquency on student loans can hurt you, prompt and regular repayment of student loans can actually help you build a solid credit history and boost your credit score. That can make buying a house easier and more affordable. Potential borrowers with a solid track record of student loan repayment look like a safe bet to a mortgage lender -- especially if their debt is paid off. Buyers without student loans may actually find it harder to build up a solid credit history.