6 Tips For Buying Your First Property When You Have Student Debt

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If you’re someone with a moderate student debt burden, some savings and a solid job, growing an investment in a home is something you can use to add to your personal wealth, house your growing family, or flip for a quick buck. A lot of coverage is given to the slow rate at which Millennials are buying homes lately. And for anyone who has graduated recently, it’s no surprise that the factor most often cited as the reason for this is their student debt load.

According to TICAS’s Project on Student Debt, the average student graduates with a $26,600 debt load, and around one in ten will come out with more than $40,000 according to Forbes. Starting “real” adulthood with this type of burden can make it difficult to grow retirement funds, invest in stocks and take the other necessary steps to having a healthy and diverse portfolio.

Student loan debt does not weigh on your creditworthiness the way credit card or auto loan debt does, however. People with considerable student loan debt who are fiscally responsible can have exceptional credit scores, and with that a great chance to take advantage of historically low interest rates. And from a lending perspective, higher education, in conjunction with a strong, consistent professional career, can be interpreted by lenders as a sign of responsibility and emotional maturity.

Once you’ve reduced your costs and started saving on a budget, here are some first steps to help get you started.

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6 Tips For Buying Your First Property When You Have Student Debt

Before you start going to open houses, pay down high interest debt now.

The higher the interest, the higher your priority should be in getting it squared up quickly. Many people pay close to the minimum on their credit card debt in favor of growing their savings, despite the fact that their payment often doesn’t even cover interest. Monthly interest for credit cards for people with near perfect credit can still hover around ten percent or more, often double or triple your student loan payments.

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Related: 10 Ridiculously Easy Actions to Take Today if You’re Serious About Purchasing Your First Property

Pay down your cards as quickly as you can, and only use them in an emergency situation. With this extra interest-payment savings, you can pay additionally on your student loans, lessening their overall burden, or tuck away money for a down payment. This will improve your credit score too, helping you get better terms on your loan.

Be mindful of your Debt-to-Income ratio.

One of the biggest factors for people who can’t get a loan despite having a good job and some savings is their DTI, or Debt-to-Income ratio. Lenders study your monthly income compared to how much you spend paying down debts such as your loan payments, credit cards, auto loans and any other installment or revolving debt.

This is among the biggest hurdles for people with student loan debt in getting loans. Look into where your DTI is early in the process so you know how far away you are from securing good terms on a loan, then make actionable steps toward that goal before you sit down with a lender.

Investigate local down payment assistance programs.

Chances are if you are making payments towards your student debt, you aren’t putting a large amount of money aside for your down payment. Many young people who have smaller savings look immediately to FHA loans, but especially in high dollar metros in places like California or New York, your FHA standard 3.5 percent can still cost tens of thousands of dollars (plus, many have higher interest rates and require mortgage insurance).

Every state and many cities have programs in place to assist qualifying homebuyers in paying their down payment. Whether they’re helping first time buyers or stabilizing neighborhoods, down payment assistance programs can be a great help to buyers whose savings have been affected by their debt load.

Consider crowdsourcing.

Sometimes the needs of the market lead people to innovate in ways wholly unfamiliar to generations before them. For our parents’ generation, signaling a stranger to drive you around was called hitchhiking; for our generation, we call it Uber.

The same type of dynamic exists in financing your investment. If you’re starting out with debt, getting more people on board or looking for a different way to kick off your investment can lessen the initial weight you carry. Alternative approaches to financing, from crowdsourcing collectives and co-ops to pitching in with trustworthy friends to get off the ground, are becoming more popular as the cost of buying a home increases in major metros.

Other alternative financing strategies such as buying owner-financed homes, rent-to-own and developing vacant land are also growing in popularity among creative youngsters looking to get started sooner rather than later.

Distressed properties.

Swing a hammer like your grandpa did. Chances are, if you are a young and indebted person with limited assets to work from, a distressed property that needs some renovation will be more in your range than a new or updated turnkey home. Do what you can yourself to save money on contractors. Remember to consider the cost of your renovation and the degree of repair that is needed; the cost of contractors can vary widely from region to region based on demand and availability.

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Related: An FHA-Financed Duplex is an Ideal First Investment Property: Here’s Why

Buy wisely.

Above all, buy a home that is going to make you money, not just the one you can afford. Thanks to advances in real estate data, we are learning more and more new things about the types of trends that appeal to different buyer demographics. Buying a home with a higher walk score, for example, can boost your rate of appreciation more than homes in car-reliant neighborhoods according to several studies.

Know about buyer trends and get a home that will earn you money in the long term, rather than trigger migraines. People whose lending options are limited may feel pressured to aim lower on the quality and location of the home they invest in for obvious reasons, but often it’s better to wait than buy an unmarketable property.

With time and patience, young people who are still paying off their education can get started on buying a home. Growing an investment with a moderate student debt burden requires preparation, but it can be done — and done successfully!

If done right, buying an investment property can provide you with the type of financial security that even makes it possible to pay off your debts more quickly than expected.

Are you looking to invest in real estate despite student debt? Have any suggestions? Questions?

Be sure to leave them below!

About Author

Nicholas Brown

Based in Los Angeles, Nicholas Brown writes and researches for JustRentToOwn.com. His interests include macroeconomics, sustainable living, personal finance, and investment trends. He has also guest blogged for several websites, including Realty Times among others.

5 Comments

  1. Frank Romine

    Nick, good topic and article.

    Tip #7. Turn off Dave Ramsey. Yes his thinking works for the “general public” but who the heck wants to be general or public. When I hear the words general public I think of the people walking around with there head down, looking at there iphone right before they get hit by a car. We need to get out of the general public and start thinking about how we can create more.

    Frank

  2. Some pretty good tips here. I’d definitely expand on that “crowdsourcing” tip – our financial situations are completely different from the previous generation’s! We are the ones who define what success is, what a good house to buy is. Don’t let what the older generation’s standards influence when or how you do something. Sometimes waiting on that house while you pay off your debt is a better idea, even if you’ll be getting a house at a “later” age than “normal”.

  3. Julian Starks

    Investigate local down payment assistance programs is great advise, in Maryland we have a Double Play Down Payment Assistance program which I will be taking advantage of soon, every little bit of assistance counts when your sitting on student loans. Great article!

    • Percy Williams

      Hello Julian….I live in Harford county Maryland. Can you direct me to where I can find information about the Double Play Down Payment Assistance program that you wrote about on July 9. Thanks for your assistance and have a great weekend.

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