Getting A Mortgage While You Have Student Loans

Do you have a steady job? Do you have a good grasp on your everyday expenses? You may think it’s the right time to buy a home – but wait! Is it a good idea to buy a house if you still have student loan debt?

Let’s look at how student loan debt may affect your ability to get a mortgage. We’ll show you how lenders view student loan debt and provide tips to improve your chances of mortgage approval.

Yes, home buyers with student loans can qualify for a mortgage because you don’t need to be 100% debt-free to buy a house. However, when a lender evaluates your application, they will look at your current debt, including your student loans.

How Student Loans Can Affect Mortgage Eligibility

Before approving a mortgage, lenders must confirm you earn enough income to cover your monthly debt payments. The more debt you have, the more challenging it may be to prove you can afford your student loans and a mortgage.

Early in the application process, a lender will determine whether you can cover both expenses by calculating your debt-to-income ratio (DTI). DTI measures gross monthly income against recurring monthly debt payments. The total debt will include your new mortgage payment with taxes and homeowners insurance, any other mortgages you may have, your minimum credit card payments, and any other loan payments including student loans and auto loans.

In most cases, lenders care more about how your monthly debt payments compares to your total income than the total dollar amount of your student loans. As long as you earn a reliable income and can meet DTI requirements with your current monthly debt payments and your new mortgage payment, you can buy a home with outstanding student loans.

Set on buying a home even though you have student loans? Here are a few ways to improve your chances of qualifying:

Consider All Loan Types

While you may be tempted to pick the first mortgage your lender offers, comparing different financing options may be more advantageous.

Conventional Mortgages

Conventional mortgages follow guidelines set by Fannie Mae and Freddie Mac, which standardize mortgage lending in the U.S. This type of mortgage requires a minimum down payment of 3% and a minimum credit score of 620. The loan has competitive interest rates and a variety of loan terms.

You’ll likely not qualify for a conventional loan if your DTI ratio is over 50%.

Government Loans

If you can’t qualify for a conventional loan, you may be able to buy a home with a government-backed loan. Because the federal government insures these loans, lenders are more willing to qualify borrowers who likely wouldn’t qualify for a conventional loan due to lower credit scores, smaller savings or high DTI ratios.

You may consider applying for an FHA loan. The Federal Housing Administration backs this popular option and may accept a maximum DTI ratio of up to 57%.

If you served in the armed forces or National Guard and meet the service requirements or are the surviving spouse of an eligible veteran, you may qualify for a Department of Veterans Affairs (VA) loan. With a VA loan, you can buy a home with a DTI ratio of up to 60% in some cases.

Pay Down Your Debt

If your DTI is too high for a mortgage, the fastest way to lower it is by paying off debt, which eliminates ongoing expenses and frees up more cash flow. Consider paying off another debt if you can’t afford to make extra payments on your student loans. For example, if you manage to pay off your credit card debt, you’ll see an almost immediate drop in your DTI ratio.

Increase Your Income

You can also lower your DTI ratio by increasing your income. That may look like working a few more hours at your job or securing a side hustle. Keep in mind that the extra income will only count toward your DTI ratio if you can prove it’s a steady source of cash. Most lenders will require at least 2 years’ worth of proof of income.

Apply With A Co-Borrower

Another way to drop your DTI ratio and increase your income is by adding a co-borrower to your mortgage. When a lender assesses your finances, they’ll include your co-borrower’s income and debts. So, if someone else is on your mortgage application, make sure their DTI ratio is better than yours and can boost your chances of approval.

Buy A Starter Home

In some cases, lenders can be flexible with eligibility requirements. If you purchase a smaller, more affordable starter home, you can make a larger down payment to keep your monthly mortgage payment within a reasonable range.

This question is an important one to contemplate before you buy a house. Consider your debt-to-income ratio, how much savings you have and your current student loan repayment plan.

Let’s walk through the steps to answer this question confidently.

Calculate Your Debt-To-Income Ratio

Before you decide to pay off your student loans or apply for a mortgage, calculate your DTI ratio. Thankfully, the calculations are straightforward.

First, add up all your recurring monthly payments. Remember, you should only include your minimum monthly payment amounts. For example, if you have $20,000 in student loan debt and your minimum monthly payment is $100, only include $100 in your DTI ratio calculation.

After you’ve totaled your debt payments, divide the number by your gross monthly income. If someone else is applying for a mortgage loan with you, you’ll need to add their monthly debt and gross monthly income to the calculation, too.

After dividing total monthly debt payments by gross monthly income, multiply the number you get by 100 to express your DTI ratio as a percentage. If your DTI is more than 50%, you could consider a government backed loan such as FHA - or work on paying down your student loans before trying to buy a home.

Evaluate Your Savings

Next, look at other areas of your finances before considering homeownership. If your DTI ratio is good, but you don’t have an emergency fund, you may want to pause your home buying journey to build up your savings.

And bear in mind that most mortgages require a down payment to purchase a home. You’ll need to save money to make this lump-sum payment. The down payment is a critical part of your overall home buying budget.

Revisit The Terms Of Your Student Loans

If your student loans have high interest rates, your loans will cost more over time. Paying down more of your higher-interest loans before you invest in a home can help you save money on interest in the long run.

Revisit the terms of your student loan repayment plan and compare your monthly payments to your accruing interest. If your payments are low but don’t cover the interest you accrue every month, you’re sliding deeper into debt. In a situation like this, one approach may be to pay more than your minimum and focus on paying off your student loans before taking on mortgage debt.

Also, keep in mind that even loans in deferment or forbearance can be calculated into your debt. Your lender will still look at these loans as if there is a required a payment. If you’re on an income based repayment plan, you should discuss it with your lender to determine how this would impact your DTI.

You don’t need to be debt-free to buy a home, but you may have trouble getting a loan if you have too much debt. In other words, make sure your financial situation is stable before investing in a home. Review your student loan repayment plan, save up for a down payment (plus an emergency fund) and research which type of mortgage best suits your needs.

If you’re ready to begin your home buying journey, get a jump-start on the initial approval process and apply for a mortgage today.