Student loan debt can affect your ability to get a mortgage. That impact comes from three major factors:
- Student loans affect your debt-to-income ratio, which is one of the criteria lenders use to evaluate your mortgage application.
- Student loans can affect your credit. The impact may be positive or negative, depending on your credit history.
- Student loan payments can make it harder to save for a down payment.
You can still get a mortgage, even with student loans, but you will have to manage your debts carefully and apply for the right mortgage at the right time.
How Does Student Loan Debt Affect Your Ability to Buy a Home?
To build a plan for getting a mortgage with student loans you have to understand how student loans can affect your mortgage application.
Student Loans Affect Your Debt to Income Ratio
Your debt-to-income ratio (DTI) is a comparison between your total monthly debt payment and your total monthly income before taxes and deductions. If your gross monthly income is $4000 and your total monthly debt payment is $1000, your DTI is 25%. If your total debt payment is $2000, your DTI is 50%.
Different lenders compute this ratio in different ways, but the debt payment figure typically includes car loans, student loans, personal loans, credit card debt, child support or alimony, and other debts.
The lower your DTI, the more likely you are to qualify for a mortgage. Many lenders prefer a DTI below 36%, which means your total monthly debt payment is 36% or less of your monthly income. Some are willing to accept a DTI of up to 43%, and some government-insured mortgages, like FHA loans, are available to borrowers with a DTI of up to 50%.
If your monthly student loan payment is large, you may find it difficult to meet the DTI requirements of some lenders, especially if you have other debts.
Student Loans Affect Your Credit
Your credit is one of the most significant factors in determining your eligibility for a mortgage. Your student loans affect your credit in several ways, and their influence can help or hurt your credit:
- Your payment history is a major part of your credit. If you make your student loan payments consistently and on time, you will establish a good payment history.
- If you miss payments or make payments late, you hurt your payment history and may harm your credit.
- The amount you still owe on your student loan relative to the total original loan can affect your credit. Owing a lower percentage of the total is better.
- Your student loans may help your credit by giving you a longer credit history and expanding your credit mix with an installment loan.
Checking your credit reports regularly will help you assess the impact that your student loans are having on your credit.
Student Loans Affect Your Ability to Save for a Down Payment
One of the most difficult parts of buying a home is saving for a down payment. A 20% down payment is ideal, but it’s hard to put that much money away when you’re struggling to make student loan payments.
This is a difficult challenge to overcome, especially if your student loans are large, you’re paying a significant sum in rent, and your income is average. It is possible, with careful planning, and there are ways to get a mortgage with a less than ideal down payment.
How to Get a Mortgage with Student Loan Debt
You can get a mortgage even with student loan debt. The National Association of Realtors reports that the average first-time homebuyer in 2018 had roughly $30,000 in student loan debt.
If you’re carrying student loan debt and you plan to buy a home, planning and preparation are essential.
Lower your Debt-to-Income Ratio
Your debt-to-income ratio is a key measure of your eligibility for a mortgage. If your debt-to-income ratio is too high, you can lower it by decreasing your debt or by increasing your income. There are several ways to decrease debt and increase income.
- If student debt is pushing your debt-to-income up, it’s easy to assume that you need to pay off more student debt. That’s not always the case. If you have several debts, start by paying off the balances with the highest interest rate, like credit card debt.
- If you have paid off any credit card debt, work on reducing your DTI by paying off your highest-interest debts as fast as possible.
- You can also lower your DTI by increasing your income. Consider asking for a raise or looking for a side job. An extra source of income can lower your DTI and help you save for a down payment at the same time.
- If you have federal student loans and your income is limited, consider an income-based repayment plan. These plans limit your debt payment to a percentage of your income and can help your DTI.
If you can keep your DTI below 43%, or even better 36%, you’ve taken a large step toward getting a mortgage.
Save for a Larger Down Payment
Once your DTI is under control, consider saving money for a down payment. A significant down payment will make it easier to get approved and may get you better terms on your mortgage.
Student loan payments can make it hard to save, but small lifestyle adjustments can add up to significant savings. Cutting spending and taking on additional work on the side can help you save.
Build Your Credit
It will be much easier to get a mortgage and to get good terms if your credit is good. There’s no magic trick that will fix bad credit, but there are basic principles that will help you achieve and sustain better credit:
- Payment history is the single most important component of your credit. Pay every bill on time and in full.
- Watch your credit utilization, which is the percentage of your available credit that you actually use. Try to keep credit card balances below 30% of your credit limit, Lower is better!
- Try to maintain a mix of installment and revolving credit. Your student loans count as an installment loan and keeping at least one credit card and using it responsibly will provide a revolving credit line to round out your mix.
- The length of your credit history affects your credit. If you have a student credit card or a first credit card keep it open, even if you rarely use it.
Monitor your credit and your credit report regularly. Look for progress, issues that could be holding you back, and potential errors.
Consider Refinancing or Consolidating Debt
Refinancing and consolidation involve taking out a new loan to pay off one or more old loans. If your credit has improved or interest rates have dropped since you took out your original loans, you may be able to save money by refinancing or consolidating debt.
- If you have multiple credit card debts, you may be able to take out a personal loan at a lower interest rate and use it to pay off your credit card debt. If you load up your cards with new debt this won’t help!
- If you’ve had a car loan for some time and your credit has improved, refinancing can reduce your interest costs.
- If you have student loans from multiple private sources, consolidation can make payments simpler and get you a lower interest rate.
- Avoid consolidating federal student loans with a private loan. You will lose some forgiveness, forbearance and income-based payment options.
- You can consolidate multiple federal loans into a single government loan. You won’t lower your interest rate, but you can make payments and record-keeping simpler.
Refinancing and consolidation will not help everyone, but they are worth investigating. Try to refinance or consolidate at least six months to a year before applying for a mortgage, as a new loan could have a temporary impact on your credit.
Lenders will consider your income and employment status. Many lenders prefer to see a minimum of 2 years of continuous employment, and some prefer 2 continuous years in the same industry.
Specific requirements vary with different lenders, but steady employment with a track record of increasing income shows lenders that your ability to pay your mortgage is likely to increase over the term of the loan.
Look for a Job that Provides Student Loan Debt Assistance
Many private sector employers now provide student loan assistance programs. If you’re considering a job change, look for a company that provides student loan assistance.
Teachers, law enforcement officers, and other public service employees may be eligible for student loan assistance and even forgiveness under some programs.
Be Prepared to Wait
All these steps involve time. Buying a home is a long-term goal, and you have to expect that preparing to apply for a mortgage may take months or even years.
When You’re Ready to Apply for a Mortgage
Planning and preparation can put you in a position to apply for a mortgage even with student loan debt. When you’re ready to apply there are steps you can take to help you get approved and help you keep your mortgage affordable:
- Get Pre-Approved. Banks and credit unions will often pre-approve you for a mortgage. There’s no commitment involved, but a pre-approval will tell you how much they are willing to lend and at what rate. Pre-approval is a great way to set a budget for your house-hunting.
- Look at government-insured mortgages. The Federal Housing Administration (FHA), the Veterans Administration (VA), the Department of Agriculture (DA) and other government agencies provide insured loans that make approval easier, even with low or no down payments in some circumstances.
- Look for first-time homebuyer assistance programs. Many federal and state agencies have programs that support first-time homebuyers. Many of these programs involve loans with minimal or even no down payments. There will be requirements, but it’s always worth looking for programs that fit your needs and credit profile.
- Find a cosigner. A cosigner with good credit can help you get a mortgage with reasonable terms. Cosigning a mortgage is a major commitment, and both you and your cosigner should be aware of the obligations and risks a cosigner face.
- Always shop for a mortgage. Research from Freddie Mac shows that borrowers who sought two mortgage quotes saved an average of $1,500 over those who only got one. Borrowers who got five quotes saved $3000 or more. Shopping for a mortgage isn’t easy but it’s worth the effort!
Don’t Let Student Loans Stop You from Getting a Mortgage
There is no reason to think that student loans make it impossible for you to get a mortgage. Many other first-time homebuyers have found mortgages and bought homes even with student loan debt. You can do it too. It will take planning, preparation, hard work, and patience, but the end of the process is owning your own home. It’s worth the effort.