To get a mortgage while managing your student loan debt, you will need to make sure your finances are strong enough to be approved for one. This may mean saving up for a substantial deposit or ensuring your earnings can cover both your student loan payments and mortgage payments, among other steps. By also choosing a lender with a track record of working with borrowers carrying student debt, your application may stand a better chance of being approved.
Key Takeaways
- Qualifying for a mortgage with student loan debt typically necessitates meeting certain lending standards, such as having a low debt-to-income (DTI) ratio and a high credit score.
- Loan forgiveness programs and income-driven repayment (IDR) plans can help you manage student loan debt while you pursue homeownership.
- Consider working with lenders who are experienced with borrowers who have student loans.
Does Student Loan Debt Affect Buying a House?
Having student loan debt can affect whether you are in a good financial position to buy a house. Making student loan payments on top of mortgage payments can be a financial strain.
In fact, many millennials point to student loan debt as a major reason that they've delayed buying a home. Every $1,000 in student loan debt delays homeownership by about four months. according to one Federal Reserve Board study.
Student loan debt affects buying a house by reducing the amount of available funds you have available for a down payment as well as housing payments. As such, mortgage lenders are less likely to approve you when you carry more debt and offer a lower down payment.
How Student Loan Debt Impacts Mortgage Approval
Student loan debt is included in the debt that is used to calculate your debt-to-income (DTI) ratio. This is the total amount of your monthly debt payments compared to your monthly income.
If you're on an income-driven repayment (IDR) plan and can show the monthly amount of that lower payment, you might be able to lower your DTI as a result.
Keep in mind that lenders might use a different formula if you have loans in forbearance or deferral. For example, you might not be making payments now, but the lender might want to figure out how to calculate your DTI for the future to ensure you can afford the mortgage.
The lender has two options if your loans are in forbearance or deferral, according to guidelines from Fannie Mae.
- Review the outstanding student loan balance and figure the payment at 1% of that balance.
- Look at the repayment terms and calculate a fully amortized payment.
Your monthly student loan payment will be added to your other debts, such as monthly credit card payments or car loans.
If your student loan payment has made your DTI ratio too high, you might be denied a loan.
Best Strategies to Manage Student Loan Debt While Buying a House
As you consider the home-buying process, there are strategies you can use to manage your student loan debt and make it easier to qualify for a mortgage.
Paying Off Your Student Loan Debt
If you're having a hard time saving up for a down payment for a home, you might be able to ease your monthly cash flow by applying for an IDR plan. If you qualify, you might be able to get a lower student loan payment, which would free up some money in your budget that can be put toward saving for a down payment.
Another strategy is to pursue student loan forgiveness or cancellation, though this isn't always an option with private student loans. Depending on your situation and your profession, you might be able to get at least a partial cancellation of your debt. Some potential programs include:
- State programs that offer some relief if you enter certain professions, such as health care or teaching
- Teacher Loan Forgiveness at the federal level
- Perkins Loan Forgiveness for certain professions and situations
- Public Service Loan Forgiveness (PSLF) if you make 120 qualifying payments while working certain government and nonprofit jobs
Having your student loans forgiven can reduce your total debt. In turn, your credit score and DTI ratio will likely improve, which will increase your chances of getting approved for a mortgage.
How to Qualify for a Mortgage With Student Loan Debt
In general, student loan debt is treated much the same as other types of debt for mortgage approval purposes. For "qualified mortgages," such as those backed by the federal government, you'll generally need below a 43% DTI. However, some lenders might allow a higher DTI.
Lenders will also take into account other criteria, such as:
- Credit score: This is an indication of how you handle credit and provides lenders with an idea of whether you're likely to make payments on time. If you have a higher credit score, you're generally considered more reliable, which means you're likely to get approved for a mortgage. If your credit score is low and you're struggling to improve it, a credit counseling service may be worth looking into.
- Income stability: If you can show that you have a stable income that's large enough to handle your student loan payments plus mortgage, you have a chance to qualify.
- Other assets: Your savings and other assets will also be considered so that the lender has a clear idea of how you might be able to handle an emergency.
If you're looking for government-backed programs, like a Federal Housing Administration (FHA) loan or VA loan, the lender may still adhere to the 43% DTI limit. The good news with these loans, however, is that you might qualify for a loan with a lower down payment and some more flexible credit terms.
How to Buy a House With Student Loan Debt
When buying a home with student loan debt, much of the process is similar to buying a home without student loan debt.
Before you begin the process, shop around and compare different lenders. Check if pre-approval is an option so you'll have a sense of how much you can borrow. Pre-approvals do not impact your credit score, as they do not require a hard credit inquiry.
Consider getting help from a buyer's real estate agent. In some cases, a buyer's agent comes at no cost to you, so the seller will end up paying the commission. A good buyer's agent can help you negotiate terms and is likely to act in your best interest. You can also get help navigating the closing process, including arranging for inspections and title insurance.
What Is the Average Student Loan Debt?
Most student loan borrowers have less than $25,000 of their own student loan debt. In total, Americans owed $1.7 trillion in student loan debt as of the third quarter of 2023.
How Much Debt Is Too Much When Buying a House?
How much debt is too much when you're buying a house will depend on your income and other assets. It will also depend on other financial factors like the amount of debt you have. For qualifying mortgages, your debt-to-income (DTI) ratio should be no more than 43%.
Should I Pay Off Student Loans Before Buying a House?
There's no requirement to pay off your student loans before buying a house. To decide whether you should buy a home while you have student loan debt, review your comfort level and if you feel you can afford to make mortgage payments on top of student loan payments.
The Bottom Line
It's possible to buy a home when you have student loan debt, but it's important to understand how your monthly payments impact your DTI. Lenders will consider your total financial situation when deciding whether to approve you for a loan. Carefully consider your financial goals and situation and determine if it makes sense for you to buy a home when you're trying to manage student loans.
