Taking out student loans was one of the worst decisions of my life. According to The Federal Reserve, the student loan debt reached $1.6 trillion in 2019.
When I meet with prospective buyers, it's not uncommon for them to have student loans. Some are able to purchase, while others have to delay things. When my wife and I bought our first home, I had small student loan debt balance. In order to put ourselves in the best possible financial position, we did the following:
Improve Your Debt To Income Ratio
Your debt to income (DTI) is taking your total monthly debt divided by your total monthly income. The lower the score, the better. The two basic ways of improving your ratio is reducing your debt and increasing your income. The latter might be more challenging to do since certain industries are furloughing and laying off workers.
Prior to buying, I was actively paying down my student loans by making extra payments. When I still in graduate school, I was making payments on my loans too. During this time, the lender wasn't charging interest. This really helped me get ahead.
Also, I live a pretty frugal life. I try to shop for deals and I really watch my spending (my great grandma would be proud) Rather than going out to eat, I cook at home. Rather than traveling the world, I normally go on one trip a year (although I haven't traveled since 2018). Pinching pennies -- small change -- added up to big savings.
Just think about it. Prior to the COVID-economy, how much did you spend on Starbucks per year? I wouldn't be surprised if that amount was in the thousands of dollars. I'm not saying you have to like a monk or nun. If you cut that spending in half, the dollar value could pay for your home inspection and a portion of your escrow closing costs.
If you want to become a homeowner, you might have to make a few sacrifices. No one said it's easy, but it could be worth it when I hand you the keys to your new home.
Improve Your Credit Score
Like DTI, a mortgage lender will also analyze your credit score. If you have a high credit score, you'll have a better chance of obtaining a lower mortgage rate. Currently, rates are in the low 3% and high 2% range.
There are many factors that contribute to your credit score. One is paying your bills on time and the second is paying your bills in full. Doing these two things consistently, you're showing the mortgage lender that you can manage debt well.
Just a reminder: keeping a credit card balance can be detrimental because the interest rates are high. If you have a balance, you should keep it as low as possible and pay it off as quick as possible.
Due to COVID-19, there are a lot of unknowns in our real estate market. However, what we do know is inventory is limited and mortgage rates are low. Although things are improving with COVID-19, we could have a fearful buyer pool. Despite the economy reopening in Hawaii, it appears some people are still hunkered down at home.
If you're interested in buying, it might be beneficial to use this time to plan out a strategy. One item I've been emphasizing with my buyers is to fully analyze their employment situation. I understand no one can predict to the future, but it's important to have a clear snapshot on what your finances will be like. I'm currently assisting a few clients with this. Feel free to contact me if you have any questions.
Stay safe and healthy. We are in this together and let's keep flattening the curve.