Buying a House With Student Loan Debt

Student loan debt is rising at a troubling rate. In fact, according to LendEDU’s average student loan debt statistics, there is $1.52 trillion in outstanding student loan debt in the United States. Homeownership rates, on the other hand, are falling—particularly among millennials.

Many Americans are forced to delay owning a home because of the burden of monthly student loan payments. Taking on a mortgage loan when you already owe so much can be difficult. The good news is, it’s often still possible to buy a home with student loans. This guide will show you how.

In this guide:

• Getting a Mortgage with Student Loans
• Other Factors That Affect Your Ability to Buy a House
• Student Loans and Mortgages: Tips to Improve Your Chances

Getting a Mortgage with Student Loans

Qualifying for a mortgage with student loans can sometimes be more difficult, but it is definitely possible. In fact, student loans aren’t a particular cause of concern for most lenders and won’t, by themselves, disqualify you from getting approved for a mortgage.

However, student loans can pose problems when they cause you to have a high debt-to-income ratio (DTI). This ratio represents your debt relative to your income, and there are two types of DTI ratios that must be below lender qualifying limits in order for you to get approved for a mortgage loan.

Front-End Ratio

The front-end ratio compares your housing costs to your income. This includes your principal and interest payments on your mortgage, as well as property taxes and insurance. The total aggregate cost of housing is abbreviated as PITI, and lenders usually want it to be below 28% of your income.

Let’s look at an example.

If your mortgage payment, including principal and interest, is $1,500 per month; your taxes are $300 per month; and your insurance is $125 per month, your PITI would be $1,925.

If you earn $5,000 per month, divide $1,925/$5,000 to get a front-end ratio of 38.5%. This is too high and your loan wouldn’t be considered affordable.

Your student loans don’t affect your front-end ratio. Only your housing costs and income do.

Back-End Ratio

Your back-end ratio could be affected by your student loans. This ratio compares your income with your total obligations, including PITI plus other monthly debt payments.

Most lenders want your back-end ratio to be below 36%. Even for FHA loans, which are guaranteed by the Federal Housing Administration, the maximum ratio is 43%.

Here’s an example:

Say your total housing costs are $1,000 per month, your student debt payment is $400 per month, your car payment is $200 per month, and you have no other debt. Add those up to get $1,600.

If your income is $5,000 monthly, your back-end ratio would be $1,600/$5,000 or 32%, so you would qualify.

If you owe a lot on your student loans and your monthly payment is very high, this could affect your back-end ratio and you might not be able to get a mortgage loan thanks to your student debt.

>> Read More: How to Lower Student Loan Payments

Other Factors That Affect Your Ability to Buy a House

There are also some other factors that can affect whether you are able to buy a house. Some relate directly to your student loans or debt-to-income ratio but others are independent.

Your Credit Score

Your credit score is a key factor in whether you can get a loan. Most mortgage lenders want a score of at least 620 for a conventional loan, although you can get a home with a score as low as 500 if you obtain an FHA loan. However, the better your score, the better your interest rates.

>> Read more: How Do Student Loans Affect Your Credit Score?

Your credit score is determined by five key factors:

• Your payment history: This factor is most important and looks at whether you’ve ever been late with payments, had any debts charged off, been evicted or sued, been foreclosed on, or had a car repossessed.
• Your credit utilization ratio: This second-most important factor considers the credit available to you divided by credit you’ve used.
• Credit mix: It’s helpful to have a variety of different kinds of debt to get the highest credit score. This includes revolving debt (such as credit cards) and installment loans (such as personal or car loans).
• The length of your credit history: This is determined by the average age of your accounts, and a longer history will result in a better score than a shorter history.
• Inquiries: This looks at new credit. Each time you apply for new credit, an inquiry goes on your report and stays on your report for two years. Your score is lowered by too many inquiries.

Improving your credit is a great way both to increase your chances of getting a mortgage and to improve the rate you’re offered—regardless of your student loan balance.

Your Income and Employment History

This is related closely to your debt-to-income ratio. The higher your income, the more confident lenders are that you’ll be able to pay off your mortgage—even if you have other debts, such as student loans.

College grads tend to earn more than those without a degree, so the impact of your college diploma on your salary could help to offset any damage your student loans do to your ability to get a mortgage.

Lenders also want to see a stable employment history, which means being employed by the same employer for at least 12 months or having at least two years of proof of income if you’re self-employed.

Your Down Payment

The more money you are willing to put down on your home, the easier it should be to qualify for a mortgage and the better the mortgage rates you’ll receive.

Most lenders require at least 10% down on a conventional mortgage, but it is possible to get an FHA loan with as little as 3.5% down. But be advised: putting down less than 20% on your home results in additional costs.

First, you’ll have to pay for private mortgage insurance (unless you get a loan guaranteed by the VA). And second, your greater debt balance will accrue even more interest every month—and at a higher rate.

Putting down more money will not only help you to get a mortgage, but it will also reduce the chances you’ll end up underwater or owing more than your home is worth if real estate values decline.

Our mortgage loan calculator can help you to see how a larger down payment can affect your total loan costs.

Student Loans and Mortgages: Tips to Improve Your Chances

If you want to improve your chances of getting a mortgage while still owing money on student loans, the most important things you can do are improve your credit score, pay off your student loans, and increase the amount of your down payment.

However, there are a few other steps you can take to improve your chances even more.

Pick Up a Side Hustle

Taking on a side gig can result in a higher monthly income, which has a positive impact on your debt-to-income ratio. It can also help you save for a larger down payment or pay off more of your debt prior to applying.

Refinance Your Student Loans

Refinancing your student loans can also be helpful if you have improved your credit score, paid down debt, or increased your income since you originally borrowed.

You may be able to qualify for a new loan at a better rate, which could result in a lower monthly payment and improved debt-to-income ratio.

But while refinancing private student loans is often a viable option, refinancing federal student loans could mean the loss of federal borrower benefits.

Also, if you refinance to extend your repayment timeline, your new loan could also cost you more in the long-run. So, think carefully before you take this step.

Get Pre-Approved Before Applying

Many mortgage lenders allow you to see if you can qualify for a loan and find out potential loan terms prior to actually applying for a mortgage. It is a good idea to do this so you can try to find a lender with whom you’ll qualify without having lenders do hard credit checks that could hurt your score.

Look for Down Payment Assistance Programs

Down payment assistance may be available through government organizations, community organizations, or non-profits. Assistance is more likely for first-time home buyers and lower-income buyers.

There are also government-guaranteed home loans that allow for much lower down payments than conventional mortgages. These include VA loans, FHA loans, and USDA loans.

If you are a first-time homebuyer from one of the states below, you may be able to find assistance programs:

• First-time home buyers in Pennsylvania
• First-time home buyers in California

Consider a Smaller Home

Buying less than you can afford—rather than overextending yourself to purchase an expensive home—can help set you up for financial success in many ways. But most of all, it will reduce the total cost of your mortgage, property tax, and maintenance costs.

You can always upsize your home later as your income increases, and your smaller starter home will hopefully increase in value, too, so you can sell it for a small profit and make a larger down payment on your next home.

>> Read More: Impact of student loan debt