If you are like most student loan debt holders you aren’t paying off your massive loan balance any time soon. While most of us will be repaying our loans for the next 10 or more years, some of us will face challenges getting new loans in the future because of our student loan balance.
Lost Lending
One of the biggest criteria lenders use to evaluate your borrowing potential is the debt-to-income (DTI) ratio. Your DTI is calculated as the total amount of monthly payment obligations towards debt accounts in relation to your total monthly income. This formula is what lenders use to decide whether or not you can reasonably afford to add the new debt payment obligation.
The minimum acceptable DTI varies depending upon the type of loan you are applying for. Mortgage loans, for example, typically carry a DTI of 36% or less. In other words, your debt obligations must not exceed 36% of your monthly income. If you make a salary of $40,000 a year you probably bring home around $2700 a month. In order for you to have a chance at securing a mortgage loan, your total debt obligations (including credit cards, car loans, student loan payments etc) must not exceed around $950 a month. The average student loan balance is $25,000 for a four year degree, where the average minimum monthly repayment is upwards of $300 a month; one third of the minimum DTI allowance.
While this may not sound unmanageable, you have to take into account all other monthly expenses. Having a mortgage payment doesn’t include other essential living expenses, let alone maintenance and insurance costs of owning a home. Many people fall into the “too much too quick” pattern of borrowing more after graduating. The bottom line in shopping for a mortgage loan while still under student loan debt obligations is to be patient, taking the time to pay down some debt while also saving more for a homeowners emergency fund. The last place you want to be is in student loan debt default or mortgage debt default.