Will I Be Able to Buy a House? The Debt-to-Income Ratio
In the “old days,” the common rule of thumb
was that you needed a 20% down payment when you bought your house,
and that a person with too much debt could not obtain a mortgage.
Today, buyers rarely put 20% down on a home, and mortgages are much
more readily available, even to persons with significant student
loan debt.
The common debt-to-income ratio used by large
banks is 30%. That means when you compare your debts to your income,
the total amount of the debt payments you must make each month
should not exceed 30% of your total income. Banks will take into
account other assets you may have, of course, in determining loan
eligibility, but the debt-to-income ratio remains a significant
factor in lending decisions.
All is not lost, however. Many credit unions
and non-traditional lenders such as mortgage brokers permit higher
levels of debt. Mortgage brokers, in particular, are used to dealing
with persons with high student loan debt, and may allow
debt-to-income ratios of 50% or even 55%. However, in order to
qualify for such a loan, you must have an excellent credit history,
meaning that you have borrowed money and paid it back on time with
few if any “black marks.” Once again, a good credit rating
is crucial. If you are a conscientious borrower, a mortgage
broker will work with you to help you obtain a mortgage. If you
qualify for a “non-conforming” mortgage, as they are called, you
usually have to pay a slightly higher interest rate on your loan.
So the prospects for home ownership are not
lost. Far from it. Nevertheless, decisions you make today about your
credit and spending habits will be very relevant down the road when
you want to buy a house. Therefore, it is never too early to
practice good debt and credit management skills. Before enrolling in
law school, it’s a good idea to sit down and make a financial plan,
one that details not only how you will pay for your education, but
also how you will pay for the things that you will want and need
upon graduation. You need to accurately assess the kind of lifestyle
you will have after law school if you borrow heavily now to pay for
it.
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