How Teachers Can Buy A Home With Student Loan Debt
Molly GraceAugust 30, 2019
Anyone whose life has been impacted by a really great teacher will tell you how important the profession is. Teachers aren’t just educators. They’re also role models that shape the minds and characters of our future leaders, caregivers, thinkers and heroes.
Unfortunately, teaching is a highly underappreciated field these days. Like anyone else who takes out student loans, many new teachers graduate with tens of thousands of dollars of debt. But unlike many graduates with a bachelor’s degree, their starting salaries tend to be lower than average.
With all that debt combined with incomes that are ill-equipped to handle it, it’s no surprise that so many teachers are struggling to afford homeownership.
Of course, many of these problems aren’t unique to teachers. College graduates being so stuck in student loan debt that they put off buying a housemay very well be one of the generation-defining stories for millennials.
Fortunately for teachers, there are a few programs and resources unique to teaching that can help ease the burden of student loan debt and make buying a house more attainable. Let’s take a look at these programs and go over some basic things that anyone with student loan debt can do to prepare for buying a home.
Teachers And Student Loan Debt
For the 69% of 2018 college graduates who took out student loans to fund their educations, loan payments take up a big chunk of their budgets. The average student loan debtfor this group is $29,800 and the average monthly payment is $393.
A person’s ability to pay off their student loan debt largely relies on how much money they earn once they leave school. Because teachers tend to make less than other degree-holding professionals, loan debt can make other financial needs or savings goals difficult to juggle.
On average, recent college graduates can expect to earn a starting salary of around $50,944. However, new teachers tend to earn significantly less than that. In 2017 – 2018, the average teacher starting salary was $39,249 according to the National Education Association.
While student loan debt can cause obstacles, such as high debt-to-income ratio or poor credit history if you’ve had trouble making payments on time, one of the biggest hardships is saving for a down payment on a house. With such a large chunk of your income going to loan payments, it can be difficult to find money in your budget for saving.
Home Buying Programs For Teachers
Fortunately, there are programs available both to teachers and the general public that can help those who feel weighed down by student loan debt.
One such program specifically geared toward teachers, law enforcement officers, firefighters and emergency medical technicians is the Good Neighbor Next Doorprogram. Operated by the Department of Housing and Urban Development (HUD), this program offers employees the opportunity to purchase eligible HUD homes in designated “revitalization areas” at a 50% discount from the listing price.
If you’re interested, you can check out the available homes in your state on the HUD Homes website. To be eligible, you must be employed full time by a state-accredited public or private school that serves students in grades prekindergarten through 12. The school you work at must be located within the same area the home you want to purchase is located. You must also agree to live in the property for at least 3 years.
If you need a loan option that’s more welcoming to first-time homebuyers and those who are unsure if they’d be able to qualify for or afford a conventional mortgage loan, you may want to look into getting an FHA, USDA or (if you’re eligible) VA loan.
Additionally, be sure to check out your state’s local homebuying programs, which may offer things like counseling, down payment assistance and other resources.
Having a large amount of debt can seriously curb your ability to get approved for a mortgage as your debts are something that lenders look at when considering your eligibility. Limiting the amount of debt you owe can make you more creditworthy in the eyes of mortgage lenders.
There are a few different programs available for student loan borrowers looking to offload some of their debt. Let’s take a look at some of the big ones.
Teacher Loan Forgiveness Program
Under the Teacher Loan Forgiveness Program, teachers who have completed 5 consecutive years of teaching full-time at a low-income school or educational service agency may be eligible for up to $17,500 forgiveness on their direct subsidized and unsubsidized, and subsidized and unsubsidized federal Stafford loans.
The amount of loan forgiveness you can get depends on the subject you teach. Math and science teachers who teach at the secondary level or special education teachers at either the elementary or secondary level may be eligible for up to $17,500 in loan forgiveness. Secondary or elementary level teachers who don’t fit these categories can receive up to $5,000.
Public Service Loan Forgiveness Program (PSLF)
The Public Service Loan Forgiveness Programis for those who are employed by government or not-for-profit organizations. PSLF forgives the remaining balance on direct loans after you’ve made 10 years of paid-in-full, on-time payments while working full-time for a qualifying employer. Under PSLF guidelines, teachers are eligible for this type of loan forgiveness.
You can be eligible for both Teacher Loan Forgiveness and PSLF, but you can’t use the same years to qualify for both. So, if you work for 5 years to receive Teacher Loan Forgiveness, you have to work another 10 while paying off your loans to receive PSLF.
If you have a large amount of student loan debt and plan on remaining in the profession for the next 10 years, PSLF may be the better value.
Perkins Loan Teacher Cancellation
If you have a Federal Perkins Loan, you may be eligible for cancellationof up to 100% of the loan if you work full-time in a public or nonprofit elementary or secondary school system. Teachers who serve students from low-income families, special education teachers and teachers in the fields of math, science, foreign languages or bilingual education are eligible for this program.
Loans are cancelled in increments, so each year you teach, a percentage is cancelled until you reach 100%.
Now, let’s talk about some of the things that you’ll need to know when you’re preparing to begin the home buying process.
Get Your Credit Mortgage-Ready
If you’ve ever taken out a loan or opened a credit card in your name, you have a credit score.
A bank or lender will look at your credit score as part of determining whether you qualify for a mortgage and what interest rate you should receive. As you probably already know, your credit score is a three-digit number that reflects your payment history and how many accounts you have in good standing. The higher your score, the less you should pay for a home loan.
How A Student Loan Affects Your Credit Score
Whether you have $1,000 or $100,000 in student loan debt, your balance should not affect your credit score. What will affect your score is making (or not making) monthly payments on time.
Having a student loan or any type of installment debt (a type of debt where you repay a loan in regular installments), can actually have a positive impact on your credit. Payment history makes up a big portion of your score, so simply making your regular payments can give you a boost. Plus, having other types of credit besides credit cards gives you a good credit mix, which looks good on your credit report.
On the flip side, if you aren’t able to make on-time payments, that can seriously hurt your score.
How To Improve Your Credit Score
Of the many home buying do’s and dont’s, building up your credit score is one of the most doable actions you can take. You can make positive gains regardless of how high your student loan balance is, and this can help you unlock the best mortgage options. Shoot for a credit score of 760 or higher to get the best interest rate possible.
Here are a few tips to raise your score:
- Make timely payments. A lot goes into a credit score, but on-time payments are the most important factor. The surest way to build your credit is by making monthly payments on time for all your accounts: car loan, credit cards and of course, student loans.
- Lower your utilization. Many experts agree that you should aim to keep your credit utilization ratio below 30%. If you can go lower, even better. Credit utilization refers to how much of your available credit you use. So, if you have a credit card with a $1,000 limit and you have a balance of $500, your utilization rate is 50%. Try to keep your utilization low by limiting credit card purchases, making multiple payments toward the card balance throughout the month or asking for a credit limit increase.
- Check your report for errors.Request a copy of your credit report from all three credit bureaus and check for inaccuracies. If you find any errors on any of the reports, contact the corresponding bureaus to dispute it.
If you need help building your credit score, downloading a credit monitoring app like Rocket HQ℠can help you keep track of your score and plan for how you’re going to improve it.
In the eyes of banks and lenders, your debt-to-income ratio(DTI) is another crucial aspect of your ability to repay a loan. In this case, the lower your ratio, the better home loan terms you can lock in.
DTI is the ratio of how much you owe versus how much money you make. So, say you make $4,000 each month, and when you add up your monthly bill payments for debts you owe (including minimum credit card payments, loan payments, etc.), you owe $1,000 each month. You’d divide your total monthly payments by your total monthly income. In this case, that means that your DTI is 25%.
The amount of DTI you can have and still qualify for a mortgage depends on a variety of factors, including your credit score, income, the type of loan and individual lender guidelines. Depending on the circumstances, you may be able to have a ratio (including your current debt payments plus the proposed new mortgage payments) of up to 50%.
How A Student Loan Affects Your DTI
Just like any debt, student loans are factored into DTI, and it’s one reason why many non-homeowners are delaying buying a home. According to a report by the National Association of REALTORS®, over half of those surveyed who believe their student loan debt is delaying their ability to purchase a home said that they couldn’t qualify for a mortgage due to their DTI.
The good news is you can take steps to lower your ratio.
How To Lower Your DTI
You either need to lower your debt or raise your income to improve your DTI. This can mean cutting back spending so you can save money to pay off debt, looking for a better paying job or taking on a side gig to increase your income.
Additionally, Fannie Mae introduced new policiesin 2017 aimed at helping borrowers with student loan debt, two of which specifically help lower the DTI of potential borrowers.
Fannie’s “debt paid by others” policy allows lenders to exclude certain types of debt, including student loan debt, from a borrower’s DTI if someone else is paying for it. For example, if you took out student loans in your name but your parents make the monthly payments on them for you, you can provide proof to your lender that someone else is paying the loan on your behalf and your lender will remove the loan from your DTI calculation.
The “student debt payment calculation” policy is helpful for those on an income-driven repayment plan. In the past, lenders would calculate DTI by looking at what you’d owe on your normal repayment plan, which could potentially be hundreds of dollars more than what you actually pay each month. This new rule allows lenders to calculate DTI based on what you actually pay, lowering your ratio.
Save For A Down Payment
A down payment is how much you pay out of pocket to buy a home. Saving for a down paymentis typically one of the biggest hurdles to homeownership that first-time homebuyers encounter and having a large monthly debt obligation can make that even more difficult.
The oft-cited numberfor what you need to put down on a home is 20%. At 20%, you’ll typically have access to better loan terms and you won’t have to pay monthly mortgage insurance. However, saving up enough to cover 20% of a home’s price is no small feat. If you purchase a $200,000 house, this means you’ll have to save $40,000
If you can’t fathom saving that much, there are low or even zero down payment options available (more on that later). But even if you don’t do the full 20%, if you get a mortgage that requires a down payment, you’ll have to save at least a few thousand dollars (plus the cash you’ll need for closing costs) to get into a home.
How To Save More While Paying Down Student Loan Debt
If you have a steady income, a good credit score and high interest student loans, you might want to consider refinancing. This can give you a better rate and lower monthly payments, making it easier to save money and lower your DTI. Just be sure to do your research and know that when you refinance federal loans you forfeit the benefits that come with them like loan forgiveness.
In addition to loan refinancing is good old-fashioned lifestyle cutbacks to boost your savings. Look for areas of your budgetyou can redirect towards savings or pick up a side hustle. Every little bit you can save will add up over time.
Take a hard look at your spending habits and cut back where you can: eating out, shopping, vacationing, etc. You may even consider moving back in with your parents if paying for rent takes up a big chunk of your income.
Low Down Payment Options
If you think it’s possible to save a few thousand dollars but that $20,000+ is out of the question, take a look at some of the low or no down payment mortgage optionsthat are available.
With a conventional loan, first-time home buyers may be able to put down as little as 3%, depending on their lender. For that $200,000 house, that means you’d only need to save up $6,000. This might still be a challenge, but it’s definitely more attainable. FHA loans also offer a low down payment option at 3.5%.
For a loan with no down payment, you’ll need to be eligible for either a USDA loan or a VA loan. USDA loans are only offered to borrowers looking to buy within certain rural and suburban areas who meet household income requirements. You can use the USDA’s online toolto see if you’re eligible. To qualify for a VA loan, you’ll need to be a U.S. military veteran, eligible active duty service member or qualified surviving spouse.
Take Control Of Your Home Buying Goals
Achieving homeowner status might not be fast or easy, especially with student loans, but it can be realistic and attainable – you just have to be prepared to put in the work and potentially make some sacrifices.
There are plenty of steps you can take to prepare financiallyto buy a home. By focusing on what you can control and exploring all your options, you can overcome student loan debt and buy your first home with confidence.
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