Debt Relief

How To Ensure Student Loan Debt Does Not Prevent You From Getting a Mortgage

With the cost of attending a university rising each year, more students are taking out student loans to pay for their education.  According to statistics from the Federal Reserve and New York Federal Reserve, more than 44 million American consumers owe a collective $1.6 trillion in student loan debt. Student borrowers oftentimes graduate with up to six figures in student loan debt. Certain steps can be taken to ensure that student loans do not prevent young adults from reaching important milestones, like homeownership.   

Income-to-Debt Ratio 

When being approved for a mortgage, the borrower’s income-to-debt ratio is an important figure considered by potential lenders. Two different ratios are used by potential lenders. One of them is called a front-end ratio, which looks at the loan applicant’s expected mortgage in comparison to his or her monthly income. The second ratio is called the back-end ratio. This figure reviews the applicant’s monthly expenses, including housing costs, car payments, student loan payments, and other monthly expenses, in comparison to the person’s monthly income. If the borrower’s debt far outweighs his or her income, it is unlikely that person will be approved for a mortgage. However, certain steps can be taken to help boost that ratio. If the potential borrower is carrying a high credit card balance, by paying that balance down, he or she can help boost chances of being approved for a mortgage. If the borrower can pay down the balance in full every month, then that debt will not even factor into his or her debt-to-income ratio.  

Additionally, the borrower can contact his or her student loan servicer to see if the student loan repayment plan can be modified so that the borrower’s monthly payment is less. While lowering the monthly payment does extend the life of the loan, it does free up income to boost the person’s debt-to-income ratio. 

Student loan borrowers can focus on paying down their smallest loan balances to eliminate at least one minimum monthly expense. Many experts recommend that borrowers focus on the highest-interest rate debt first, but if someone is seeking to quickly improve his or her credit score and debt-to-income ratio, eliminating at one monthly payment will certainly help.  

Before making any changes, the potential borrower should ask the mortgage lender how they calculate the debt-to-income ratio and how evidence of the person’s income and monthly expenses should be presented.   

Large Down Payment 

Another helpful method that borrowers can use to seek mortgage approval is to make the amount borrowed smaller by making a larger down payment. If the borrower anticipates applying for a mortgage soon, it is recommended that he or she save up money for a larger down payment so that the money is available when they start the loan application. The more money that is paid at the time of the lending application, the less the borrower will need to take out, which means the easier the approval process will be for him or her. Not all borrowers are able to do this necessarily, especially if they have large monthly student loan payments to make, but any extra amount helps.  

Boost Credit Scores  

The potential borrower’s credit score plays a major part in determining whether he or she will be approved for a mortgage. By exercising good financial habits, the borrower can boost his or her credit score, which will improve that person’s chances of being approved for financing. Paying bills on time, keeping accounts out of default, and keeping balances low are all excellent methods for boosting credit scores. It can also help to maintain older accounts with a low balance or no balance to show that the individual has a positive credit history and a larger amount of available credit. 

Consistency in Employment 

The potential lender will also want to see that the borrower is responsible and has stable employment.  It is never recommended that someone change jobs prior to applying for any large sum of credit or financing. Traditionally, lenders look for at least two years of stable employment with the borrower’s current employer before approving financing. If the individual is hoping to make a change in the near future, it may be advisable to hold off on applying for a new job until the home purchase is complete. Employment stability can often help boost that person’s chances of being approved, especially if he or she is applying with a substantial student loan debt balance.  Lenders want to see that the person will be able to keep making monthly payments on the mortgage, on top of what he or she is already paying on other monthly obligations. 

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For borrowers who are struggling with student loan debt, relief options are available.  Many student loan borrowers are unaware that they have rights and repayment options available to them, such as postponement of loan payments, reduction of payments or even a complete discharge of the debt. There are ways to file for bankruptcy with student loan debt.  It is important you contact an experienced Miami bankruptcy attorney who can advise you of all your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com. 

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