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Getting a mortgage is a major financial undertaking As exciting as buying a home may be, the process of qualifying for a loan can be daunting, especially if you have existing debts like student loans.
I’ve helped many clients navigate this process over my 10 years as a mortgage broker. In this article, I’ll explain how student loans can impact mortgage approval and share tips for securing financing even with student debt.
How Lenders Assess Your Ability to Repay
When reviewing a mortgage application lenders want to see that you have the means to make your monthly payments. They evaluate this mainly through your
- Debt-to-income ratio (DTI) – This measures your monthly debts versus gross monthly income. Most lenders want your DTI below 36-43%.
- Credit score – Scores of 620+ are generally required, with 720+ preferred. Higher scores mean lower interest rates.
- Down payment amount – Ideally 20% or more of the purchase price. Larger down payments reduce risk for lenders.
Student loans count toward your DTI, so having a lot of debt can impact approval. That said, there are still financing options available.
How Student Loan Debt Affects Your DTI
Your DTI ratio compares your total monthly debt payments to your gross monthly income:
DTI = Monthly Debt Payments / Gross Monthly Income
Debts factored into this calculation generally include:
- Mortgage payment
- Student loan payments
- Credit card payments
- Auto, personal, and other loan payments
- Child support or alimony
For example:
- Gross Monthly Income: $5,000
- Proposed Mortgage Payment: $1,500
- Student Loan Payment: $300
- Credit Card Payments: $200
- Total Monthly Debt Payments: $2,000
- DTI = $2,000/$5,000 = 40%
In this example, the DTI exceeds 36% but is within limits that some lenders allow.
Student loans have a major impact on DTI. The more debt you have, the higher your ratio will be.
Strategies for Meeting DTI Requirements
If your DTI is too high, here are some options for lowering it to qualify for a mortgage:
- Make extra student loan payments to reduce the monthly payment factored into your DTI.
- Refinance student loans to a lower payment. Be sure it’s worth paying closing costs.
- Enroll in income-driven repayment to potentially lower payments.
- Extend your loan term to lower monthly payments.
- Pay down debts besides student loans to improve your ratio.
- Increase your income through a raise, new job, or side hustle.
- Add a co-signer with good credit and income to help you qualify.
Shopping lenders can help too, as DTI requirements vary. FHA loans allow up to 57% DTI with compensating factors.
How Student Loans Affect Your Credit Score
While having student loans doesn’t hurt your credit score, falling behind on payments can significantly damage it.
Lenders view past late payments and collections very negatively. So it’s critical to keep accounts in good standing when applying for a mortgage.
If you currently have delinquencies but have reestablished a good payment pattern, you may still get approved if you meet other requirements. An FHA loan can be an option here.
However, it’s wise to improve your credit before applying. Pay down balances, dispute errors, and let time pass to distance yourself from past issues.
Tips for First-Time Homebuyers with Student Debt
As a first-time buyer with student debt, consider these tips when mortgage shopping:
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Prioritize your down payment savings to put down 20% if possible. This helps offset debt concerns.
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Give yourself time to pay down loans before applying, at least 2 years of on-time payments.
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Consider loan programs for first-time buyers like Fannie Mae HomeReady or Freddie Mac Home Possible loans. These offer low down payments and flexible credit guidelines.
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Ask about down payment assistance programs through local housing agencies. These provide grants or low interest second loans to cover your down payment, which helps you qualify.
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Get preapproved early so you know the loan amount and terms you can qualify for. Being preapproved makes your offer stronger when you find a home.
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Build your credit aggressively leading up to your home search. Having scores above 720 will get you the best mortgage rates.
While student loans add complexity, homeownership is achievable even with debt through careful planning.
Federal Student Loan Programs to Explore
Most federal student loans are eligible for income-driven repayment (IDR) plans. These base your payment on income and family size rather than total debt.
Common options include:
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REPAYE – Payment capped at 10% of discretionary income. Forgiveness after 20-25 years.
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PAYE – Payment capped at 10% of discretionary income. Forgiveness after 20 years.
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IBR – Payment capped at 10-15% of discretionary income. Forgiveness after 20-25 years.
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ICR – Payment capped at 20% of discretionary income. Forgiveness after 25 years.
These plans can create more affordable payments that may help you qualify for a mortgage, especially REPAYE and PAYE. You’ll pay more interest over the loan term, but can get forgiveness of any balance remaining after the term ends.
VA Loans – A Great Option for Military Borrowers
If you or your spouse served in the military, I’d strongly recommend looking at VA home loans.
VA loans offer significant benefits including:
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No down payment required – This helps if you don’t have much savings due to student debt.
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No monthly mortgage insurance – Saving you over $100 per month versus conventional loans.
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Flexible DTI requirements – VA lenders generally allow DTI ratios up to 41%, higher than conventional loans.
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No prepayment penalties – You can pay off the loan early without penalty to help pay off student debt faster.
Due to the 100% financing and lenient DTI, it’s possible to get a VA mortgage even with a high student loan balance. I’ve helped many veterans in this situation buy successfully.
Be aware the VA does limit the amount you can borrow based on your county’s lending limit. But for most areas, you can still finance a sizable purchase.
Partnering With the Right Lender
As a mortgage broker, I act as your advocate, helping you understand financing options and connecting you with lenders willing to approve loans within your circumstances.
The right lender makes a big difference in getting approved with student debt. Here are signs of a good lending partner:
- Looks at your whole financial picture, not just DTI or scores
- Will manually underwrite loans upon request
- Offers alternative loan programs besides conventional mortgages
- Provides customized loan options tailored to your situation
- Communicates proactively on application status
As your broker, I have established relationships with over 100 lenders. My goal is to match you with one aligned to your scenario, maximizing approval odds.
Buying a Home is Achievable, Even with Debt
The key takeaway – student loans don’t preclude you from buying, but they introduce extra qualifying hurdles. With proper planning and an experienced broker, many navigate student debt successfully to become homeowners.
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- Even if youre paying off student loans, its still possible to get a mortgage.
- Having student loans impacts your debt-to-income ratio. Ideally, you should aim for a DTI ratio of 36 percent or less, though some lenders may allow as high as 50 percent.
- Depending on your circumstances, it might be better to focus on paying off student loans before buying a home.
Even with student loans, it’s possible to qualify for a mortgage if you meet certain requirements, including the maximum debt-to-income (DTI) ratio. Here’s how student loans factor into this figure.
Mortgage options for homebuyers with student loans
If you have student loans and want a mortgage, there are multiple home loan programs you might qualify for, including:
- Fannie Mae HomeReady loan – A low-down payment option for lower-income borrowers, with cancellable mortgage insurance
- Freddie Mac Home Possible loan – A similar low-down payment option for lower-income borrowers, with the flexibility to apply sweat equity toward the down payment or closing costs
- Freddie Mac HomeOne loan – Another low-down payment option offered by Freddie Mac specifically for first-time homebuyers
- FHA loan – Insured by the Federal Housing Administration (FHA) and requires a down payment of just 3.5 percent
- VA loan – For active-duty service members, veterans and surviving spouses, with no down payment or mortgage insurance required
- USDA loan – For borrowers in predetermined “rural” areas; you can check eligibility through the USDA website
Life Hack- How to Use your Mortgage to Pay off your Student loans!
FAQ
Does having student loans affect getting a mortgage?
Can you buy a house even if you have student loans?
Can you get a mortgage with 100k in student loans?
How to exclude student loans from a mortgage?
What happens if you roll student loans into a mortgage?
As a result of rolling your student loans into a mortgage, you may: Risk losing your home: Rolling your student debt into your mortgage can make your once unsecured loans secured. If you default on the loan because the payments are higher, you could lose your home since your house is the collateral for your mortgage.
Can you get a mortgage with student loan debt?
Student loan debt can make it harder — but not impossible — for you to get a mortgage. Lenders consider student loan debt as a part of your total debt-to-income (DTI) ratio, which is a vital indicator of whether you’ll be able to make your future mortgage payments. Here’s what to know about getting a mortgage with student loans.
Do student loans affect my ability to get a mortgage?
It’s important to note that student loans usually don’t affect your ability to qualify for a mortgage any differently than other types of debt you have on your credit report, such as credit card debt and auto loans. Most lenders care about the size of your monthly student loan payments, not the total amount of student loan debt you have.
Can you afford student loans and a mortgage?
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).