How to Buy an Acreage Home Even with Student Loan (and other) Debt

My Secrets for Buying an Acreage Home

Buying a home can be confusing and even intimidating at times. That’s why the tips and strategies you’ll find in my 8-week series will set you on the right path. It’s my unique approach and a “behind the scenes” glimpse of what you should look out for and consider when starting your own search for an acreage home.

Is student loan debt (or car loan, medical bills, credit card bills, fill in the blank here) holding you back from being a homeowner?

You’re not alone.

Many acreage home buyers feel like their debt being a heavy weight on their shoulder, and that the debt debt takes them out of the game when buying an acreage home. But, most of the time, it doesn’t!

So don’t emphasize a roadblock in your mind to the perfect acreage home if you have student loan debt, or other types of debt like a car loan, medical bills, and credit card bills. Most everyone does, even people who have bought an acreage home. There are ways to work with lenders and assistance programs to make your acreage home purchase a reality – whether it’s a first home or a forever home!

I understand that you may be grappling about whether you should pay off your student loan (and other) debt first before you even purchase a home. That could be an option but don’t make it your only one. There are other options for you to consider so you don’t have to delay years until getting your dreamed acreage home!

Don’t forget to consult with your own financial advisor to determine what is best for your situation.

How Lenders Look at Student Debt

Let’s get to the basics first. When you buy an acreage home, a lender will look at your debt-to-income ratio or DTI. It’s the amount of recurring debt you have monthly compared to your gross monthly income. In a lender’s eyes, your DTI is more important than your credit score or how much money you have for a down payment.

Why?

A lender needs to consider your recurring debt – such as a car loan, credit card payments AND your student loan(s) – in order to determine if you can afford more debt with a monthly mortgage payment.

However, most lenders like to stick to the 28/36 rule. And that’s where the 36% DTI from above comes into play.

• The 36% is the back-end ratio and equals your entire monthly housing costs expenses (principal, interest, mortgage insurance, property taxes, or PITI) plus other debts (student loan, car loan, credit cards, etc.) divided by your gross monthly income. It’s the DTI we explained above, and you don’t want to go above 36%.
• The 28% is part of the front-end ratio equals your monthly housing expenses (PITI) divided by your gross monthly income. Your other recurring debt is not included. Again, a lender doesn’t want to see it above 28%.

Keep in mind, your DTI has nothing to do with your credit score or how well you pay back your debt. It’s looking at the amount of debt obligation you currently when compared to your income. Not whether you’ve been good at paying your obligated debt each month. But it’s important to keep doing that too!

How to Lower Your DTI

If you need to lower your monthly debt and obligations, start with your student loan lender(s). Here are some options to consider. Remember to always consult with your own financial advisor before pursuing.

• Graduated repayment plan – payments start low and rise every two years as your income should rise.
• Loan consolidation – if you have more than one student loan, combine them into one with a lower interest rate.
• Lengthen your payback term – spread out your loan repayment over more years to lower your monthly obligation. This will increase your long-term interest payments so carefully way the pros and cons of this strategy.

Examine all of your financial obligations and find other ways to lower you DTI:

• Is there any way to lower your credit card usage therefore lower (typically) the most expensive debt? Every dollar “saved” from paying debt is a dollar more in you qualifying for a higher monthly payment.
• See if you can negotiate a lower minimum monthly repayment requirement on your credit cards, especially one that is on the higher side. Some credit card companies are willing to work with you if you have a good credit score and payment history.
• If you currently have a car loan, what is the interest rate? See if you can negotiate a lower interest rate therefore lower monthly payment.
• If you have been doing a good job at work, is it a good time to ask for a pay raise?
• Consider bumping up your monthly income with a side job … every little bit could help your cash flow and savings!

Keep Increased Loan Limits In Mind

Increased loan limits for 2024 just came out recently –  FHA (single family residence) allows for up to $498,257 and conforming loan allows for up to $766,550, both in Fresno County. Now it can be easier for many buyers to qualify for conforming loans backed by Freddie Mac and Fannie Mae. There is always jumbo loan (for when you have to borrow more than the conforming limit), but typically requires a larger down payment, and sometimes higher interest rate. This is great news for those of you waiting on the sideline, contemplating with debt and constrained cash flow.

California Dream for All Program

The Dream For All Shared Appreciation Loan is a down payment assistance program for first-time homebuyers to be used in conjunction with the Dream For All Conventional first mortgage for down payment and/or closing costs.

The conventional first mortgage lets you borrow 80% of the home’s value, while the down payment assistance program lends you the remaining 20% at the time of purchase. When you sell the home, you pay back the original 20% borrowed, plus 20% of the appreciation in the value of the home.

Tapping into Federal Loan Programs

There are several government programs that offer loans to borrowers with student loans. Each has different requirements and may not be a good option for you. However, one may make your homeownership dreams comes true.

• USDA Loan – allows up to a 41% DTI and 0% down payment.
• VA Loan Guaranty – Buyers who have served in the military can qualify for a loan with 41% DTI. That can be overridden if some of your income tax free.
• FHA Loan – Usually allows a 43% DTI but will sometime allow a higher DTI on case-by-case basis.

Tapping into Equity of Your Current Home

If you already own a home, the equity from your current home can contribute to the down payment of your next acreage home, and limit your monthly payment so you can keep your DTI low. If you are considering doing some renovations in order to maximize your current home’s equity, Fresno County offers Housing Assistance Rehabilitation Program (HARP) that is a zero interest loan for homeowners to bring their home up to current building codes.

Are You Ready?

Evaluate if you’re truly ready for your next acreage home even though you have student loans and other debt to pay back. This is both a big financial and lifestyle commitment.

Honestly answer questions about yourself. Do you have a good job with steady income with expectations of more earning power? Do you plan to remain in the next home for the next 5 years minimum? Are you growing out of your current home? Have you been paying back all debt obligations and have some money saved?

It takes time to think through the questions and to take actions towards lowering your DTI (and getting in the habit of doing it until you close on your acreage home). Maybe you’re not so sure on your answers yet or maybe you’re anxious to move forward. Either way, just know that I am here to help you determine if homeownership is right for you now or in the near future. It does take some planning even if you don’t have any loans, so schedule a call with me and we can come up with a plan based on your timeframe.

Don’t let student loan or other debt slow your acreage home buying dreams.

Up next week is our final article in My Secrets to Buying an Acreage Home series. You’ll find out why Buying a Home Is Like Falling In Love! It’s a topic you don’t want to miss.