I’m not going to kid you: it’s tough to buy a Nashville home when you’ve got student loans and college debt.
But what exactly is the problem, and how can potential home buyers in Nashville overcome it?
The problem is that student loans can be included in the buyer’s debt-to-income ratio, or DTI. And the debt-to-income ratio is the percentage of monthly income that is spent on any of your debt payments, including mortgages, student loans, auto loans, credit card payments and even your child support. A high a ratio of total household monthly debt payments, when compared to your monthly income — typically, lenders want that number to be no higher than 43 percent to 45 percent — means you as an applicant are carrying too much debt. Carrying too much debt, and most mortgage officers will assume that you are more likely to default on the mortgage. Such applicants typically have a tougher time getting approved than people with lower DTIs.
To determine your ratio, add up all your monthly debts, including car, student loan and credit card expenses and the potential mortgage payment, and divide it by your gross monthly income. In order for a mortgage to be backed by the government, this number can’t be higher than 43%.
But Home Buying Can Still Make Financial Sense
Low mortgage rates and high rents make buying an attractive option, but you should be ready to put some roots down. If you’re planning to stay in a home for at least two years, buying is more financially advantageous than renting in 70% of housing markets, according to a recent report from Zillow.
But there are other options if you don’t have that much cash sitting around. The Federal Housing Administration backs FHA mortgages that require as little as 3.5% down.
Putting less down will likely lead to higher interest rates on the loan, but with interest rates still so low, now could be the time to pounce. Given the current environment, it’s not going to be that big of a difference, but it adds up over 30 years. That said, it’s usually better than continuing to rent for the next five to 10 years. If you itemize, the cost of that money is pretty darn cheap.
Keep in mind that if you don’t put 20% down, there’s a good chance the lender will require private mortgage insurance. These premiums protect the lender if you miss a payment.