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Paying Off Student Loan Debt & Buying a House — How It Is Possible

Personal Finance
parents carry boxes into home with daughter and balance paying off student loan debt and buying a house

As housing and rental costs skyrocket in many areas, many prospective homeowners are developing a now-or-never attitude. And this includes plenty of people who are trying to figure out how to make it work while still paying off student loan debt.

While buying a home is largely dependent on the future of rising real estate markets, there's no doubt you could successfully take out a mortgage while still paying off student loans — if you approach it the right way.

Here are the best practices for paying off student loan debt and buying a house.

Calculate the Real Cost

Have you just started looking at housing costs? You may be amazed by how low the average mortgage seems, but have you also looked at the fine print? One reason some new homeowners struggle financially is they don't realize how much it truly costs to own a home.

They forget to factor in private mortgage insurance, homeowners insurance, property taxes, regular maintenance costs, unexpected repairs and more. It can be quite a shock to see how much everything costs to own a home — especially if you've been living in an apartment where your landlord takes care of things like mowing the lawn, shoveling snow and regular repairs.

Every prospective homeowner should keep these expenses in mind when deciding how much house they can afford. Run some figures to determine what size monthly mortgage could fit into your budget. Then, use that to calculate what kind of house you could buy. Having a realistic target in mind can help you feel more comfortable about pulling the trigger.

Save for a Down Payment

Just about everyone, whether they have student loan debt or are debt-free, needs to save up for a down payment to buy a house. A down payment is an initial amount you have to provide to the lender to secure a mortgage.

A common recommendation is that homeowners put down 20 percent of the selling price, but that figure could be unrealistic for people who are also dealing with student loan debt. Fortunately, mortgages backed by the Federal Housing Authority can have down payments as low as 3.5 percent, while some conventional lenders will accept down payments of 5 percent.

Consider saving for a down payment as soon as you decide you want to buy a house. For a $150,000 home, for example, you may need to put down between $5,250 and $30,000, depending on your lender's requirements. Of course, saving that much could be hard if you have student loan debt. So, create a savings plan and give yourself as much time as possible to save.

If you're still struggling to save for a down payment while paying your student loan debt, you might think about refinancing those loans to get a smaller monthly payment. You could also shake up your budget and cut out unnecessary expenses. These expenses could include meals out, nights at the bar, shopping sprees, subscription services and more.

And once you have your down payment finalized, continue saving for house repairs and more — so you'll be prepared for unexpected costs.

Change Your Student Loan Payment

When you apply for a mortgage, one of the first things a lender looks at is your debt-to-income ratio, which is the percentage of your current monthly income that goes toward loan repayments. These include auto loans, personal loans, credit card payments and (of course) student loans.

An ideal debt-to-income ratio should be 43 percent or less, according to the Consumer Financial Protection Bureau. You likely won't qualify for a mortgage or will have to pay higher interest rates if your debt-to-income ratio is higher. Even if you do qualify, having a high debt-to-income ratio could make it harder to pay your mortgage and other expenses if you lose your job or have a costly medical emergency.

To give yourself some additional budgetary leeway, consider lowering your student loan payments. Graduates with federal student loans can change their repayment plan easily, according to the Department of Education. And those with private student loans could refinance to a lower monthly payment.

When you switch to a smaller monthly payment, you'll be in a better position to shoulder the financial burden if your house suddenly needs a new roof or suffers extensive damage from a storm. And when no repairs are required, you can make additional payments on your student loans.

Look Carefully Before Buying

Buying a house is an exciting experience — especially if you've been renting from a neglectful landlord who considers fixing your toilet to be an "optional" repair. But rushing into homeownership could be a bad idea, as a wrong decision could potentially cost you thousands of dollars.

No matter what people say about the market, always take the time to scout out a home thoroughly. Get an inspection, consult with your real estate agent and seek out a second opinion. Once you sign up for a mortgage, you're stuck with it until you sell the house or pay it off — so tread carefully.

Paying off student loan debt and buying a house may seem contradictory. But with smart planning and saving, you could find a way to make your homeownership dreams a reality.

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Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.