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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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