Guidance from Your Michigan Bank
With more than two-thirds of college graduates financing their education with loans, many new home buyers wonder whether they’ll qualify for a mortgage. It's a valid concern because any debt, including a student loan, can affect your ability to secure a home mortgage from banks in Michigan.
Lenders consider all financial obligations as they review a home loan application.
A key metric that banks use during the mortgage application process is the debt-to-income (DTI) ratio.
DTI = Total recurring monthly debt (credit card, car loan, student loan) / Total monthly gross income
Some Michigan banks may accept a DTI below 43 percent, but many prefer an index below 36 percent to confirm customers can handle a mortgage payment without a struggle.
But student loan debt doesn’t need to stall your dream of owning a home. Our team has compiled the following guidelines for effectively managing debt and strengthening your financial position.
Protect Your Credit Score
Michigan banks will assess your credit score when you apply for a mortgage. A FICO credit score rates your credit history based on the amount and type of debt you carry, and your payment history.
You can boost your credit score, even with student debt, with these tactics:
- Make payments on time every month. Many banks in Ann Arbor, Grand Rapids, and Detroit offer automated bill pay with a personal checking account to help customers manage their payments on-time through a single source. Payment history on your student loans and other debts will impact your credit score. If you fall behind on monthly bills, you can expect your credit score to decline.
- Minimize your credit card debt. Another metric affecting your credit score is your credit utilization ratio, which shows the amount of credit you have available. If you have 2 credit cards with $1,000 of credit on each, and you’re carrying a total balance of $500, your credit utilization ratio is 50 percent. Strive to keep this metric below 30 percent to show you can manage your existing debt.
Tackle Your Debt
When you actively take control of your debt, you become financially stronger. Conversations with lenders about buying a home can focus on your goals instead of your debt management skills.
Actions that can help include:
- Paying more than the minimum balance due on your debt. Skipping a few discretionary purchases to pay down your student loan or other obligations will improve your DTI.
- Refinancing or consolidating loans. If you have several Federal student loans, you may qualify for the U.S. Department of Education’s loan consolidation program. You’ll have a single payment to manage and may include more flexibility in your repayment schedule. Some banks also offer refinancing or loan consolidation for private student loans.
Explore Ways to Increase Income
In addition to providing more cash to pay down debt or put toward a house down payment, more income improves your DTI.
Direct ways to add income include:
- taking a part-time role
- starting a side gig
- asking for a raise from your current employer—why not, it’s worth a try!
Some employers assist with student loan debt. Many companies and state governments across the U.S. offer repayment support as an employee benefit. If you’re willing to explore a new role, you may see a faster reduction in your debt load.
Talk with Your Michigan Bank about First-Time Home Buyer Programs
Several programs exist that enable first-time homebuyers to get a mortgage loan with lower down payments, even if they have less-than-ideal financial and credit metrics.
Loan support is available through the:
Many banks in Michigan offer the above loan programs for first-time homebuyers. Research your local Michigan banks online and contact a lender to learn more about the programs they offer and what might work best for your situation. At Level One Bank, we even have a Physician Mortgage Loan program designed to accomodate the unique financial needs of doctors and medical residents who often have large amounts of student loan debt. Learn more about our loan programs here.
For more information about managing student loan debt or mortgages for first-time homebuyers, contact our team. We’re here to help you realize your dreams!
"The fastest way to pay off debt is to stop listening to the voice that tells you that you're never going to be debt-free. Believe in yourself." – anonymous