How to Buy a House If You Have Student Loans

Buying a house while you hold student loans isn’t impossible, but it can be challenging. 

According to a National Association of Realtors study, 35% of would-be homebuyers said student loans were their biggest hurdle to saving for a down payment. The average age of first-time homebuyers is now 36, compared to ages 28 to 33 in previous generations, based on data collected since 1981. 

While student debt can be an obstacle, buying a home is still possible, even if you have a low down payment. Here’s a closer look at how to become a homeowner, despite your student loans. 

Do student loans affect buying a house? 

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

However, student loans can pose problems if they cause you to have a high debt-to-income ratio (DTI). This ratio represents your debt relative to your income. Two types of DTI—front-end and back-end—must be below lender qualifying limits to get approved for a mortgage loan.

Type of DTI	What is it?	Do student loans affect it?
Front-end ratio	PITI / Monthly income	❌
Back-end ratio	Total debt obligations / Monthly income	✅

Front-end ratio

The front-end ratio compares your housing costs to your income. This includes your PITI: principal and interest payments on your mortgage, plus property taxes and insurance. Most lenders want this total aggregate cost of housing to be below 28% of your income.

Let’s look at an example.

Monthly housing payment (mortgage + taxes + insurance)	Gross income (pre-tax)	Front-end ratio
$1,925	$5,000	38.5%

If you earn $5,000 per month before taxes, 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

Student loans could affect your back-end ratio, however. 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 typically 43%.

Here’s an example:

Monthly housing payment (mortgage + taxes + insurance)	$1,000
Student loan payment	$400
Car payments	$200
Total	$1,600

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

If your monthly student loan payments are high, this could affect your back-end ratio, and you might not be able to get a mortgage loan without lowering your debt payments or increasing your income first.

>> Read more: How to lower student loan payments

Student loans and mortgage approval

Student loans seem to stand in the way of homeownership for many borrowers. According to EducationData.org, homeownership has decreased by 1.8% for every $1,000 increase in student debt among college graduates under 35. 

Between 2005 and 2014, student loan debt among 24- to 32-year-olds doubled while the rate of homeownership dropped 20%. 

As mentioned, your monthly student loan payments impact your back-end DTI, which compares your gross monthly income with your monthly debt payments. You generally need a DTI no higher than 36% to qualify for a home loan. 

Here’s a closer look at how your student loan debt can impact your back-end DTI and, therefore, your chances of qualifying for a mortgage, depending on your balance. 

Buying a house with $50K student loans

Let’s say you want to buy a home but owe $50,000 in student loans. Assuming a 5.5% interest rate, here’s how much you’d pay on your student loans on the standard 10-year plan: 

Total loan amount	Interest rate	Monthly payments on standard plan	Total interest costs
$50,000	5.5%	$543	$15,116

Now, let’s say that your other debt payments and proposed monthly housing costs with your new mortgage add up to $1,500. To keep your back-end DTI ratio at 36% or below, which is what mortgage lenders prefer, you’d need to earn a gross monthly income of at least $5,675. 

Buying a house with $100K student loans

Some borrowers owe three figures of student loan debt. Here’s what your costs would look like with a $100,000 student loan balance on the standard repayment plan: 

Total loan amount	Interest rate	Monthly payments on standard plan	Total interest costs
$100,000	5.5%	$1,085	$30,232

Assuming the same monthly payment obligations of $1,500 on top of your student loan payment, you’d need a gross monthly income of at least $7,181 to keep your back-end DTI at 36% or below 

Buying a house with $200K student loans

Now let’s say you owe twice that much. Here’s what you’d be paying on the standard plan if you owe $200,000 in student loans: 

Total loan amount	Interest rate	Monthly payments on standard plan	Total interest costs
$200,000	5.5%	$2,171	$60,463

Assuming the same additional monthly costs, you’d have to make at least $10,197 pre-tax for back-end DTI below 36%. 

If those numbers sound out of reach, you could also keep your back-end DTI down by reducing your monthly student loan payments. Two main ways to accomplish this are by signing up for income-driven repayment or refinancing your student loans. 

• An income-driven plan adjusts payments on your federal student loans to a percentage of your discretionary income. It also extends your loan terms to 20 or 25 years. 
• Refinancing, on the other hand, means replacing one or more of your student loans with a new loan from a private lender. You could pick longer repayment terms to get a lower monthly payment.

Note that refinancing federal loans turns them private, meaning they’d no longer be eligible for income-driven repayment or other federal benefits. 

Ask the expert

David Haas

CFP®

Buying a home has many advantages over renting. Your housing costs become more stable and you are insulated against rent increases. You can do what you want with your home, including renovations or starting a garden. Mortgage principal payments are a form of savings, and assuming your home value increases, your wealth can rise. But there are disadvantages as well. Buying a home ties you to the area, and you will need stable income to pay your mortgage. If you can’t afford your student loan payments, you may be able to go into forbearance or enter a payment plan, but if you don’t pay your mortgage, you may be forced into foreclosure and become homeless. While you may be able to sell your home again, you usually have to stay there for five to 10 years to ensure a profit and even then, it’s not guaranteed. The other important thing to realize is that you are now your landlord, and you are responsible for home maintenance. If your water heater dies, you will need a robust emergency fund to make sure you can quickly replace it.

What if you can’t get a mortgage because of student loans?

If you want to improve your chances of getting a mortgage while paying student loans, there are several steps you can take. Here are some of the most effective approaches.

Improve your credit score 

Your credit score plays a major role in whether or not you get approved for a mortgage, as well as the interest rate you qualify for. 

While credit score requirements vary, conventional lenders generally want to see a score of 620 or higher. A good score of 670 and up will help you qualify for the best rates, making your mortgage more affordable. 

Some ways to improve your credit score include paying your bills on time and keeping your credit utilization below 30%. Avoid closing old accounts, such as credit cards, to not shorten your credit history. 

Reviewing a free copy of your credit report from AnnualCreditReport.com is also worth reviewing. If you spot any errors, file a dispute to remove them. 

Pay off your student loans or other debts

Paying off your student loans can eliminate that monthly payment from your life, making saving for a down payment easier while reducing your DTI ratio. Plus, you’ll reduce your “amounts owed,” which could improve your credit score. 

If you can make extra payments or qualify for a student loan forgiveness program, you could get rid of your student loan debt ahead of schedule. 

The same thing goes for paying off your credit card debt or auto loans. Credit card debt can be some of the most expensive debt you have, and you can save a lot of money by paying them off. 

You should think twice about buying a new car once your auto loan is paid off. Most cars on the road today can last 10 years or more, and the longer you drive the car loan-free, the more money you save.

Increase your down payment 

Most conventional lenders want to see a down payment of at least 3%, but a higher down payment could make qualifying for a home loan easier.

With a higher down payment, you can request a lower loan amount, which may seem less risky to a lender. If you can put down a 20% down payment, you can also avoid paying private mortgage insurance (PMI). 

Ask the expert

David Haas

CFP®

The best way to save for a home downpayment is to put aside money with each paycheck into a high-yield savings account dedicated to your down payment. If you get some extra money, perhaps from a bonus at work or a tax refund, put that money into the account, too. You will be surprised how quickly it can add up.

Pick up a side hustle

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

Refinancing private student loans is often a viable option, but refinancing federal student loans means losing federal borrower benefits, such as income-driven repayment and Public Service Loan Forgiveness.

Also, if you refinance to extend your repayment timeline, your new loan could cost you more in the long run due to interest accumulation.

Get preapproved before applying

Many mortgage lenders allow you to see whether you can qualify for a loan and find out potential loan terms before applying for a mortgage via preapproval. This is wise so you can find a lender you’ll qualify with and bypass hard credit checks that could hurt your score. 

Plus, getting preapproved before putting an offer in on a house is a good idea since this will usually cause home sellers to take your offer more seriously. 

Look for down payment assistance programs

Down payment assistance may be available through government organizations, community organizations, or nonprofits. Assistance is more likely for first-time homebuyers and low-income buyers.

Government-guaranteed home loans may also allow for lower down payments or higher DTI ratios than conventional mortgages. These include VA loans, FHA loans, and USDA loans.

Conforming mortgages require a down payment of 20% without requiring the extra cost of Private Mortgage Insurance (PMI). When you have a lower down payment, PMI is required. Some lenders may go as low as a down payment of 3% and a back-end DTI no higher than 36%. 

FHA loans have a slightly higher down payment requirement of 3.5%, but they allow for a DTI of up to 43%. VA and USDA loans allow a 0% down payment for qualifying borrowers and a DTI of up to 41%. 

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 ideally, your smaller starter home will increase in value, so you can sell it for a profit and make a larger down payment on your next home.

>> Read more: Impact of student loan debt

Student loan mortgage FAQ

Besides student loans, what else do lenders consider for mortgage approval?

Lenders consider various factors for mortgage approval, including your income, debt-to-income ratio, credit rating, and assets, such as a checking or savings account. Lenders consider these factors to evaluate your risk as a borrower and ensure you can repay your home loan. 

Does buying a home while holding student loan debt make sense, or should I wait?

Buying a home when you have student loan debt can make sense if you can afford both your monthly mortgage and student loan payments. 

Rather than waiting to pay off your student loans in full, you may benefit from starting to build equity, especially if you can snag a competitive mortgage rate. 

However, everyone’s situation is different, so you’ll have to consider how homeownership would fit in with your budget and other financial goals when making your decision.  

Do private and federal student loans affect getting a mortgage equally?

Both private and federal student loans can impact your debt-to-income ratio. 

However, federal student loans are eligible for various repayment plans, so you may have an easier time reducing your federal student loan payments than your private ones to decrease your back-end DTI and improve your chances of qualifying for a mortgage.