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Student Loans And Mortgages: Your Guide To Buying A House While Paying Off Student Loan Debt

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Published on May 18, 2022
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Homeownership is a major financial commitment. If you already have student loans weighing down your finances, then getting a mortgage can come with a few extra hurdles. Let’s explore how student loans and mortgage options interact.

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How Is Getting A Mortgage Different When You Have Student Loans?

Getting a mortgage with student loans is the same as getting a mortgage without student loans. What does change is your debt-to-income (DTI) ratio. A higher DTI can make it more difficult to get a mortgage.

So while the basics of getting a mortgage don’t change, those with student loans may have some extra hurdles to face in the home buying process. Here’s a closer look at the process home buyers must undergo.

The first step is getting a preapproval. You’ll need to provide information about your financial situation, including your student loans, to the lender.

In the underwriting process, the lender will look at your current debt, credit score, income, assets and recent bank activity.

After taking a look at the financial details you provided, the lender will issue a preapproval letter if you are a good candidate for a mortgage. The lender lets you know how much they are willing to lend you within this document. The amount included is based on a close inspection of your financial documents.

If you’re working with Rocket Mortgage®, you’ll receive a Verified Approval Letter. With this document, you can shop confidently for homes within your budget. Plus, sellers know you have the means to pay for the home when making an offer, which can help your offer stand apart from any others.

After making an offer using your preapproval letter, the home must appraise at the appropriate value. From there, you will receive a Closing Disclosure from the lender, which details the finalized terms of your loan and closing costs. If everything looks good to you, then you can sign the loan documents at closing.

How Does Having Student Loans Affect Buying A House?

If you have student loans, they will impact your home buying process. But perhaps not as significantly as you might think. Buying a house with student loans is still possible for many.

Most borrowers seeking a home loan have some kind of debt on their books. Lenders will take all current debt into account by calculating your debt-to-income (DTI) ratio. If you have student loans, lenders will factor this into your DTI.

What Is Debt-To-Income (DTI) Ratio?

Debt-to-income (DTI) ratio is a key metric that mortgage lenders consider. Essentially, your DTI indicates what percentage of your monthly income is used to make debt payments.

With a high DTI, it can be difficult to get a mortgage. In fact, most lenders are only willing to accept a DTI of 50% or lower. But most mortgage lenders would prefer to see a lower DTI ratio, around 35% or less.

Calculating DTI

Want to know where your DTI stands? Here’s how to calculate it.

First, add up all of your regular, recurring and required monthly payments. A few of the monthly payments you should include in your debt burden include:

  • Rent or current monthly mortgage payment
  • Minimum credit card payments
  • Required student loan payments
  • Renters' insurance premium or homeowners’ insurance premium
  • Auto loan payments
  • Personal loan payments
  • Court-ordered payments like back taxes, alimony or child support

But not all of your monthly bills should be included in your DTI. A few to leave out include:

  • Utility bills
  • Groceries
  • Entertainment costs
  • Transportation costs
  • Savings account contributions
  • 401(k) or IRA contributions
  • Health insurance premiums
  • Extra debt payments toward your principal

Essentially, you should only include required payments. In the case of student loans, you should only include the minimum required payment you must make each month. So even if you have $10,000 in student loan debt, if your monthly payment is only $100, that’s the number you should include in your DTI calculations.

Once you’ve added up your required monthly payments, divide that by your gross income, which is the amount you earn before you pay taxes. Then multiply the number by 100 to arrive at your DTI ratio as a percentage.

Example Of DTI

Let’s explore an example of how DTI works in real life. In this example, you have a total gross monthly income of $5,000. And your monthly debts are below:

  • Rent: $985
  • Renter’s insurance: $15
  • Minimum student loan payment: $200
  • Minimum credit card payment: $150
  • Minimum auto loan payment: $150

First, let’s add up your monthly debts. In this case, your total monthly debts would amount to $1,500. Next, we’ll divide the $1,500 by $5,000. So, your DTI ratio is 0.30, or 30%.

Take a minute to add up your DTI ratio to see how your payments stack up against your income. If your DTI is more than 50%, that might be too high to qualify for a mortgage. If possible, work on paying down debts to lower your DTI ratio.

How Can You Improve Your Chances Of Qualifying For A Mortgage With Student Loan Debt?

If you have student loan debt, that won’t necessarily stand in the way of qualifying for a mortgage. But if you are worried that the size of your student loan payments will limit your home buying opportunities, here are some ways to improve your mortgage approval chances.

Consider All Types Of Home Loans Available To You

Not all home loan types are created equally. That’s especially true when it comes to homebuyers with student loan debt. It’s important to explore all of your options to maximize your mortgage approval chances.

Here are some options to consider:

  • Conventional loans: A conventional loan is a type of loan that adheres to the guidelines determined by Fannie Mae and Freddie Mac. You might not qualify for this type of loan if your DTI is higher than 50%.
  • FHA loans: An FHA loan is a government-backed loan through the Federal Housing Administration. Borrowers pursuing this loan type can qualify with a DTI ratio of up to 57%.
  • VA loans: A VA loan is another type of government-backed loan through the Department of Veterans Affairs. If you meet the military service requirements, you could qualify for a VA loan with a DTI ratio of up to 60%.

Pay Off Your Other Debts

The most effective way to lower your DTI ratio is to pay off some of your outstanding debts. Each time you eliminate a debt from your balance sheet, you can reclaim that piece of your monthly budget. With an increased amount of free cash flow, you’ll lower your DTI.

Although paying off debt is easier said than done, consider tackling your smallest liability. Even eliminating one relatively small debt can make a big difference in your DTI.

Increase Your Monthly Income

If paying down debt is not an option on your current income, increasing your monthly income is another way to improve your DTI. A higher income will push your DTI down.

A few ways to increase your income include picking up extra hours at work or building a side hustle. But it’s important to note that lenders will require this income to be regular and recurring to count in your DTI ratio.

Refinance Your Federal And Private Student Loans

Refinancing your federal and private student loans can be a useful option. If you can unlock a lower interest rate through a refinance, that could lead to a significantly lower monthly payment.

Refinancing private student loans with a lower interest rate is an easy decision. But when it comes to federal student loans, there are more factors to consider.

If you refinance federal student loans, you may lose access to income-driven repayment programs and any federal student loan forgiveness plans. Before moving forward with a refinance, make sure to research all of your options.

Consolidate Your Federal Student Loans

If you consolidate your federal student loans through the Department of Education, you won’t be able to tap into a lower interest rate. But it’s still possible to lower your monthly payment by extending your loan term during the consolidation process.

As a borrower, extending the term of your loan means letting your student loans stick around for longer. But the lower monthly payment could give your budget the breathing room it needs for your home buying plans.

Roll Student Loans Into Your Mortgage

Do you have an existing mortgage? If you do, consolidating your mortgage and student loans could be a viable option. In this scenario, you could use a cash-out refinance to pay off your student loan debts.

When you consolidate your mortgage and student loans, you’ll create a single monthly payment to keep up with. Typically, you’ll find a lower interest rate attached to the debt when you pursue this option.

But this strategy means you’ll lose any federal borrower protections. Plus, you’ll put your home at risk. If you are unable to keep up with the new mortgage payment, you could lose your home.

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Should You Pay Off Your Students Loans Before Applying For A Mortgage?

You can get a home loan with student loans. But should you?

As a student loan borrower, it can be difficult to know the best path forward. Should you pay off your student loans? Or should you apply for a mortgage with student loans on the books?

Here are some things to consider as you make this decision.

Examine Your Current DTI Ratio

First things first, take the time to calculate your current DTI ratio.

The dollar amount of your debt is less important to lenders than how your debt balance compares to your total income. So, if you have a DTI of over 50%, then it might not be the right time to buy a home. Instead, focus on paying down some of your debts or increasing your income to lower your DTI ratio.

If you have a relatively low DTI, then there’s nothing stopping you from applying for a mortgage. A low DTI ratio indicates to lenders that you have the means to handle a new monthly mortgage payment.

Evaluate Your Savings

Your DTI ratio is just one of many factors to consider when pursuing homeownership. In addition to an income that can support your debt obligations, you should also evaluate your current savings.

Before you can close on a home, you’ll need to make a down payment. Even if you qualify for a low down payment mortgage, you could still be stuck spending thousands of dollars upfront. Consider the home prices in your area and make sure you have a reasonable down payment available.

After closing, you’ll be responsible for the upkeep and maintenance of the property. When something goes wrong, you can’t call a landlord. Instead, you’ll be in charge of the repairs. And you’ll have to cover the costs that go along with that.

The burden of home maintenance costs means that homeowners should have an emergency fund in place to cover unexpected repairs. For example, let’s say that your refrigerator breaks. If it’s not under warranty, you’ll be responsible for repairing or replacing the appliance. That could mean spending hundreds of dollars unexpectedly.

And finally, homeownership is one of many savings goals. You should also evaluate whether or not you are on track for big savings goals like retirement. If you aren’t contributing any savings toward retirement, that could mean it’s better to hold off on homeownership for now.

Optimize Your Student Loans

When considering homeownership, it’s a good time to evaluate your finances. If you have student loans, it’s an excellent time to dive into the details.

Take a close look at your student loans and make sure that the repayment schedule you are on works for you. For example, if you have a high interest loan and a low minimum monthly payment, make sure that the payment is at least covering the occurring interest. Otherwise, you could be sinking further into debt, even if you are keeping up with the required payments.

Additionally, explore your refinancing options and any forgiveness programs you qualify for. A little bit of digging could transform the trajectory of your personal finances.

The Bottom Line

Buying a home with student debt is possible for many. Lenders don’t require you to be debt-free when buying a home. But if you have a DTI higher than 50%, you could struggle to obtain a mortgage.

Are you ready to pursue homeownership? Get preapproved today.

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Sarah Sharkey

Sarah Sharkey is a personal finance writer who enjoys diving into the details to help readers make savvy financial decisions. She’s covered mortgages, money management, insurance, budgeting, and more. She lives in Florida with her husband and dog. When she's not writing, she's outside exploring the coast. You can connect with her on LinkedIn.