If you’re getting ready to buy a home and you have federal student loan debt, here are some things to consider.
Student loan debt and your mortgage application
Like most forms of debt, student loans offer an opportunity to build your credit reputation. By making the minimum payment on time, you can demonstrate your commitment to meeting your financial obligations. Especially for younger consumers who may have had only limited chances to build credit, student loans can be one of their first opportunities to start building their credit history.
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It’s important to keep in mind, however, that creditors will consider your debt-to-income and available debt-to-credit ratios. If you’re looking to take out a large mortgage and your income or remaining credit isn’t building up, lenders may be more hesitant to invest in you, which could raise your interest rate. If you’re planning to buy soon, you may want to speed up your student loan repayments or other lines of credit to even out the ratio.
How student loan debt compares to other debt
Similar to a car loan or a mortgage loan, student loans are categorized as installment loans. The borrower repays the original amount, plus interest, over a period. Once the loan is repaid, the account is closed. In the case of federal student loans, the interest rates are fixed and tend to be lower. Recovery plans generally reflect the fact that graduates are just beginning their careers and are likely to earn an entry salary.
Federal student loans differ from credit card debt in several ways. Credit card interest rates tend to be more volatile and fluctuate more depending on the economic climate. So while you may want to prioritize paying off student debt to improve your debt-to-income ratio, it’s important to balance that with paying off credit card debt to bring in more structure, stability and predictability to your finances.
Preparing and consolidating credit for the future
After more than two years of government forbearance, you should use the next few months to prepare for the resumption of payments. Especially if you graduated during the pandemic, you may not have made a payment yet, so this is an opportunity to review and familiarize yourself with the process.
First, make sure you know who to repay. Since the payment pause began, you may find that you now owe payments to another student loan service. If you make payments to the wrong repairer, the mistake could be a headache to fix and could hurt your credit report and credit scores.
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If you have questions about who your repairer is, visit studentaid.gov or call 800-433-3243. If you have a new repairer, arrangements such as automatic payment may not have been put in place and the resulting missed payments could end up on your credit report.
Also, confirm that you know how to make the payments, how much your monthly payment will be, when the payments are due, and your adjusted schedule for repaying all the money, taking into account the change.
If you can figure out the exact amount you will need to pay, start saving that amount or be prepared to save that amount with each paycheck, perhaps in $50 increments until the payment is due.
Don’t repay the loan until you have to because there’s a chance of getting a federal rebate or yet another extension, but make a habit of repaying the loan to yourself. Over time, you will see these funds increase, giving you a cushion in case of an emergency or if you want to make a special purchase.
If you were having trouble making your payments before the moratorium took effect and missed several months, verify that the account is still with the federal loan holder and has not been transferred to a collection agency. If you owe money to a collection agency, whether student loans or not, it’s important to prioritize those payments now so your credit has time to recover before applying for a loan. mortgage.
You can also use the next few months to make sure you have the income stream and savings to start making regular payments starting in September. To get started, review your student loan payment information and check your credit report weekly for free at annualcreditreport.com.
Francis Creighton is the President and CEO of the DC-based Consumer Data Industry Association.