If you’re burdened with student loan debt, being handed the keys to a new construction home might feel impossible. That’s not necessarily the case, though. Lenders consider a lot more than just your student debt amount when evaluating your mortgage application. And the cost to own a home—even a new construction home—can be more affordable than renting, depending on where you live.
Below, we’ll walk you through buying a new construction home with student loan debt.
What are New Construction Homes?
When you think about a new construction home, you might envision large mansion-like homes in picture-perfect neighborhoods. While those certainly do exist, not all new construction homes fall into that category. Developers build new homes in all different sizes across many different price points. To qualify as a new construction, the home just needs to be newly built and not lived in yet.
Benefits of Buying a Newly Constructed Home for Student Loan Holders
People choose new construction homes over existing homes for several reasons, like being able to customize the property or to live in a new area with lots of families. If you have student debt, you’ll be pleased to hear that many of the benefits of living in a new construction home vs. an older home can actually save you some money and time.
Cheaper Utility Bills
A new construction home is usually more energy-efficient than an older home. It has new windows, better wall insulation, and new green appliances. Energy-efficient homes are not only better for the planet, but they’re also easier on your wallet.
You can check with a builder to see exactly what energy-efficient choices they made when constructing the new build. There’s a very good chance you’ll have lower monthly utility bills compared to living in a similar-sized older home. Those monthly savings will make it easier to stay on top of your mortgage and student loan payments.
Fewer Repairs & Less Maintenance
Unexpected home emergencies can eat up your emergency fund and ruin your budget. With a new build, your home has a new roof, new windows, new siding, new sidewalks, new plumbing, etc. It has all new appliances too. You shouldn’t need to repair or fix anything in your home for a while.
Even if you run into a problem, many builders do free repair work for at least the first year that you’re in the new build. Plus, many individual components (like the windows, roof, appliances) have warranties that last even longer than that. Talk to the builder about their warranty options so that you know exactly what to expect.
Easier to Negotiate Sale Price
Getting an individual seller to knock down the price of their home can be difficult. They’ve lived in the home, feel attached to it, and often need to sell it for a certain amount for the sale to be worthwhile. For those reasons and others, people who buy new construction homes have more bargaining power than people buying from individual sellers. Christopher Rachuba of Rachuba Home Builders says, “a $30,000 hit [spread] over 30 lots hurts a lot less than a $30,000 hit on one existing house.”
More Time for a Side Hustle
Your home is new and livable, so you can spend your free time and weekends however you wish instead of on home renovations and repairs. For some student loan borrowers, that means more time you can spend working overtime or on a side hustle.
Can I Buy a New Construction Home with Student Debt?
Don’t just assume that your student debt will disqualify you from a mortgage. Getting a mortgage with student loans is possible.
When reviewing your mortgage application, a lender looks at your whole credit history and financial picture, not just your student loans. And it doesn’t matter if you’re applying for a mortgage for an older home or a new construction home. What matters is your anticipated ability to repay the money that you’re borrowing.
Lenders look at your debt-to-income (DTI) ratio, income, history of on-time payments, and other factors shown in your credit report.
DTI Ratio Needed to Buy a Home
A DTI ratio compares your monthly debt to your monthly income. Lenders use it to determine whether or not you can afford to take on additional debt. The ratio factors in your monthly student loan payments.
To calculate your DTI ratio, a lender will add up your monthly debt obligations, including the anticipated monthly mortgage payment, HOA fees, and insurance. Next, they’ll add up all of your gross monthly income, also called pre-tax income. Finally, they divide your recurring monthly debt by your gross monthly income and multiply by 100. The result is your DTI ratio as a percentage.
Lenders use the 28/36 rule to evaluate your application. They want to see no more than 28% of your gross monthly income going toward housing expenses. This is called your front-end DTI. They want to see no more than 36% of your gross monthly income going toward all debt obligations. This is called your back-end DTI.
Calculating your DTI ratio in the same manner will help you determine:
- If now is a good time to buy a home
- How much house you can afford
- How much debt you need to pay off before you can buy a home
- If you should refinance your student loans to a longer loan term to lower your monthly debt obligation
- How much more income you need to bring each month to afford a home
For more in-depth details on what to include when calculating your DTI ratio, read our article, Debt-to-Income Ratio.
Credit Score Needed to Buy a Home
Lenders and first-time homebuyer programs set minimum credit score requirements that you’ll need to meet to buy a new build. Conventional mortgage lenders look for a minimum credit score of around 640. Loans backed by the government like USDA loans and FHA loans set lower minimum credit score requirements. For example, the lowest minimum credit score to qualify for an FHA loan is just 500.
Student loans can help or hurt your credit score. If you make on-time payments, student loans help your credit score, especially if you’ve had the debt for a while. They prove to a future lender that you can responsibly manage debt.
If you’re behind on your student loan payments, that’s a different story. Late payments and defaulted loans both bring your credit score down. Fortunately, you can take steps to repair the damage. For example, you could talk to your lender about getting a “Goodwill Adjustment” or removal. You contact your lender to explain the reason for your late payment and to ask that they remove the negative report from the information they submit to the credit bureaus. This essentially “erases” the late payment so that it doesn’t harm your credit score.
Learn some other ways to boost your credit score with our article, Top Seven Tips on How to Improve Credit Score in 30 Days.
Financing a New Construction Home with Student Debt
If you want to purchase a new construction home, you have several different financing options. Don’t just assume one is automatically better than another, though. See what programs you might qualify for, apply to get rates, and then compare your options.
Mortgage Through the Builder
Some home developers do more than just build homes. They also have their own in-house mortgage companies. While there’s no guarantee going with the in-house lender will save you money, it’s worth looking into.
Sometimes the builder’s lender will offer an incentive if you choose them—like knocking $14,000 off the listed sale price. Sometimes you’ll have access to better rates than you would if you went with an outside lender. It really depends on how the market is, how the lender operates, and how your finances are.
Other Financing Benefits of a New Construction Home
If a new home builder doesn’t have its own mortgage company, you might still receive some financing assistance. Sometimes larger home developers will pay all or some of your closing costs or pay points to help you get a better rate. That lower rate could end up saving you thousands of dollars over the life of the loan.
Other Ways to Finance a New Construction Home
First-Time Home Buyer Loans
If the new construction home is your first home, you might qualify for a first-time home buyer loan with $0 down, or at least less than 20% down. First-time home buyer loan programs include USDA loans, FHA loans, and VA loans, which were designed to make buying a home more affordable for those with lower credit scores or lower incomes.
First-time home buyer loans work great for student loan holders. You don’t need to save up to buy the home. If you do have savings, you can put those savings toward other higher interest rate debts instead.
You can also borrow a conventional mortgage from a bank, credit union, or mortgage company. It’s a mortgage product that’s not backed by a government entity. According to Forbes, 64% of home loans are conventional mortgages. Borrowers need a minimum credit score of around 640 to qualify and need to put down 20% to avoid mortgage insurance.
Final Thoughts on Buying a New Construction Home with Student Loan Debt
You can buy a new construction home with student loan debt; you just need to be smart. Don’t buy more house than you can handle. If you’re concerned about your monthly budget being too tight, consider a cheaper home or focus on paying down your other debts first. Most importantly, don’t accept the first offer you receive. You should negotiate the price with the builder, and you should compare offers from multiple lenders.
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