Maryland SmartBuy 3.0 gives homebuyers an opportunity to purchase any home in Maryland that meets Maryland Mortgage Program guidelines while paying off student debt.
To qualify for the Maryland SmartBuy 3.0 program, homebuyers must have an existing student debt with a minimum balance of $1,000. Maryland SmartBuy 3.0 financing provides up to 15% of the home purchase price for the borrower to pay off their outstanding student debt with a maximum payoff amount of $20,000.
The full student debt for at least one of the borrowers must be paid off at the time of the home purchase, and homebuyers must meet all eligibility requirements for the Maryland Mortgage program.
Student loans have become an increasingly common burden for many young people looking to buy their first home. With over 43 million Americans holding a collective $1.7 trillion in student loan debt, this issue prevents countless potential homebuyers from achieving their dream of homeownership.
As a first-time buyer trying to navigate the complex process of purchasing property with existing student loan debt, it can seem extremely daunting. You may be asking yourself questions like:
- How do lenders view my debt when applying for a mortgage?
- What loan options work best for borrowers with student loans?
- Will I qualify for a mortgage at all with my current debt?
Not to worry! While student loans can complicate the home buying process, having existing student debt does not preclude you from purchasing your first home. Follow this comprehensive guide to educate yourself on the mortgage process as a first-time buyer with student loans. With the right preparation and loan program, you can absolutely buy a house, even while still paying off your student debt.
How Student Debt Affects Mortgage Approval
When applying for a home loan, mortgage lenders carefully evaluate your finances to determine the maximum amount they can safely lend to you. Two of the most important factors are your debt-to-income ratio (DTI) and credit score. Unfortunately, student loans negatively impact both of these key deciding metrics for most borrowers.
High Debt-to-Income Ratio
Your DTI compares your total monthly debt payments to your gross monthly income. The higher your DTI, the harder it will be to get approved for a competitive mortgage loan. Student loans count toward your recurring monthly debts, so they directly increase your back-end DTI.
For example
- Gross Monthly Income = $5,000
- Total Monthly Debt Payments = $750
- $300 Student Loans
- $250 Car Loan
- $200 Credit Card Minimums
- DTI = Total Debt Payments / Gross Income
- $750 / $5,000 = 15%
As you can see, student loans claimed a full 40% of total debt payments in this scenario!
Lower Credit Scores
High student loan balances and any late payments can drag down your credit, making lenders more hesitant to work with you. Paying down balances and maintaining on-time payments is key to maximize your score.
The good news? Several mortgage programs offer more flexible DTI requirements or low down payment options to benefit borrowers with student debt. Let’s explore some of the best options…
Best Mortgage Programs for Student Loan Borrowers
While every borrower’s situation is different, the loan programs below tend to work well for buyers still paying down student debt.
1. FHA Loan
FHA loans are government-backed mortgages that allow for low down payments and more lenient DTI ratios. Down payments can be as low as 3.5% with a credit score of just 580. DTIs up to 50% may be approved with proper documentation.
2. VA Loan
Like FHA, VA loans are backed by the government and feature zero down payment options. There is also no ongoing mortgage insurance. VA loans can override the 41% DTI cap with special circumstances.
3. USDA Loan
For low-income buyers purchasing in select rural areas, USDA loans offer 100% financing and flexible DTI requirements. Credit scores as low as 640 may qualify.
4. Fannie Mae HomeReady
HomeReady mortgages help creditworthy low- to moderate-income borrowers. You can qualify with just 3% down and more relaxed DTI limits. PMI rates are also lower.
5. Down Payment Assistance
Down payment help through grants and forgivable loans eases the cash required at closing. Programs exist in every state and assist qualified first-time buyers.
Strategies to Improve Your Mortgage Outlook
If your student debt is limiting your home shopping budget, here are some potential strategies to improve your mortgage approval odds:
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Pay down balances – Lower loan balances directly reduce your DTI by decreasing monthly payments.
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Make extra payments – Overpaying student loans builds equity faster. Consider rounding up each payment.
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Refinance private loans – Refinancing or consolidating private student loans could lower interest rates. Federal loans have fewer refi options.
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Shift repayment strategy – Adjusting your payment plan could temporarily reduce monthly dues. Review options with your servicer.
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Request lower rates – Contact providers to negotiate a lower interest rate on private loans. Recent grads may qualify for reductions.
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Apply with a co-borrower – Adding another applicant strengthens the mortgage application. Combined income improves your DTI.
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Improve credit – Boost your score by paying all debts on time and limiting hard inquiries on your credit report.
With smart preparation, borrowers with student loan debt can still achieve their homeownership dreams. Identify the right mortgage program, improve your financial profile, and consult experienced loan officers. Be upfront about your goals, income, debts, and assets so they can provide tailored guidance.
While student loans can be challenging, they should not stop you from building wealth through home equity. Follow these tips and you will be ready to buy your first home, even with existing education debt.
NBC covers Maryland SmartBuy
NBC Nightly News with Lester Holt recently ran a profile of Marylands SmartBuy program. Reporter Jo Ling Kent interviewed Harford couple Jasmine Townsel and Brian Hawkins, who were the first couple to purchase a home through the program. See their story below. Center_Content
Approved SmartBuy Mortgage Lenders
Financing for the Maryland SmartBuy 3.0 program is available only through approved Maryland SmartBuy lenders. These lenders can help you confirm your eligibility and ensure you meet all applicable requirements.
Take Advantage of a First-Time Homebuyer’s Program?
Are there first-time home buyer programs?
There are first-time home buyer programs, including down payment assistance (DPA) programs, that may help make financing a home more attainable, especially if you’re managing paying off student loans. Zillow’s guide to first-time home buyer programs will help give you more information on resources you should look into as you explore your options.
Can I buy a house if I have a student loan?
If you want to buy a house as a current student or a former student who’s dealing with student loans, consider the programs available to you based on your debt-to-income (DTI) ratio, credit score and funds available for a down payment. You may not qualify for a conventional loan if you have a DTI ratio higher than 50%.
Can a first-time buyer buy a home with student debt?
As a first-time buyer with student debt, there are a number of mortgage loan programs well-suited to finance your home purchase. Many allow for a low down payment or even zero down. And some programs can be flexible about your debt-to-income ratio — which is a big help when you have monthly student loan payments. 1. Standard conventional loan
Which loan program is best for first-time home buyers with student loan debt?
HomeReady or Home Possible loan Fannie Mae’s HomeReady loan and Freddie Mac’s Home Possible loan could be perfect for first-time home buyers with student loan debt. These conventional loan programs are specifically meant for home buyers with lower income and higher debt levels.