Using Student Loans to Buy a House: A Complete Guide

A home is probably the largest purchase youll ever make in your lifetime. It requires a lot of time and discipline. But its a decision that shouldnt be taken lightly. After all, it costs a lot of money for anyone—even those who work full-time.

Buying a home can be even more challenging for someone who may be paying for college, too. But just because youre a student doesnt mean its impossible to live the dream. If youre still a student and want to be a homeowner, read on to learn more about what you need to know about being a college-going mortgagor and tips you may be able to use to balance the two.

Buying a house is an exciting milestone in life However, coming up with the down payment while still paying off student loans can be challenging for many first-time homebuyers In this comprehensive guide, I’ll walk you through everything you need to know about leveraging student loans to achieve your dream of homeownership.

Can You Use Student Loans to Buy a House?

The short answer is yes you can use student loans to cover the down payment and closing costs on a home mortgage. However there are some caveats to be aware of.

Federal student loans like Stafford and Perkins loans cannot be used directly for a down payment. These loans must be used for qualified educational expenses. However, you can use private student loans from banks and other lenders to finance a home purchase.

Another option is to take out a personal loan from an online lender like SoFi or Earnest. While not technically a student loan, these unsecured loans are popular among student borrowers transitioning out of college. Personal loans typically have lower interest rates than private student loans.

The key is looking at the totality of your finances. As long as your income, credit, and debt-to-income ratio are in good shape, having outstanding student loans shouldn’t prevent you from buying a home.

How Student Loans Impact Mortgage Eligibility

Lenders will look at your student loan debt when evaluating you for a mortgage. Here are some key factors they consider:

Debt-to-Income Ratio: Lenders calculate your DTI by adding up your monthly debt payments including student loans and dividing it by your gross monthly income. The lower your DTI, the better.
Credit Score: Making payments on time helps build your credit. Missed or late payments can hurt it. Aim for a score over 740.
Savings: Student loans can make it harder to save up for a down payment. Programs like VA and USDA loans allow 0% down but most mortgages require 3-20%.
Interest Rates: The higher the interest rate on your student loans, the more they will cost long-term. Consider paying down high-interest private loans first.

As long as your finances check out, having student loans doesn’t have to stop you from achieving homeownership.

Tips for Qualifying for a Mortgage with Student Debt

If your student loans are making it hard to qualify for a mortgage, here are some strategies to improve your chances:

Pay down debts – Reducing credit card or auto loan balances can quickly improve your DTI.
Increase income – Boost your earnings with a side hustle or promotion and provide 2 years of proof.
Get a cosigner – Add someone with better finances to strengthen your application.
Consider loan types – Explore FHA and VA options which allow higher DTIs.
Buy a starter home – Opt for a less expensive, smaller home to keep payments affordable.

Taking steps to optimize your finances can set you up for success in getting approved.

Using Private Student Loans for a Down Payment

Private student loans from banks and online lenders can provide funds to cover your down payment and closing costs. Here are some pros and cons to weigh:

Pros

Bypass restrictions on federal loan usage
Potentially lower interest rates than credit cards
Faster funding than personal loans

Cons

Higher rates than federal loans
Origination and repayment fees
Can’t defer payment like with federal options

Crunch the numbers carefully and compare to alternatives like family loans or gift funds. Avoid piling on excessive debt.

Should I Pay Off Student Loans or Buy a House?

Trying to decide whether to pay off student debt or save up to buy a home? Here are some key factors to help make the decision:

Interest rates – Pay down high-interest private loans aggressively before taking on new lower-rate mortgage debt.
DTI ratio – If your ratio exceeds 43-50%, focus on student debt before homebuying.
Down payment savings – Build up funds for at least 3-20% down before purchasing.
Loan terms – Make sure your payments cover accruing interest so the balance decreases.
Money habits – Don’t stretch your budget too thin. Buy an affordable home you can manage.

Evaluate your entire financial picture. In many cases, you can achieve both goals simultaneously by budgeting wisely.

Steps to Buying a Home with Student Loans

Follow these steps for a smooth process:

Calculate affordability – Factor in income, debts, and down payment savings using a mortgage calculator.
Get pre-qualified – Find out what mortgage amount and loan types you may be eligible for.
Pay down debts – Reducing balances can help improve your DTI.
Compare loan options – Consider FHA, USDA, and VA advantages if you don’t qualify for conventional financing.
Shop for lenders – Compare mortgage rates and fees to find the best fit.
Find the right home – Search for a house or condo within your approved budget.
Submit offer – Make an offer and negotiate the purchase price.
Finalize financing – Provide documents for underwriting and get final mortgage approval.
Close and move in! – Sign papers, transfer funds, get keys and begin your new life as a homeowner!

With proper planning and financial preparation, you can achieve the dream of homeownership, even with student loans.

Alternatives to Student Loans for Down Payment

While leveraging student loans can provide funds for your down payment, also look at these options:

Family gift – Ask relatives for help with part of the down payment amount.
Employer assistance – Some companies offer down payment programs as a job benefit.
State/local programs – Explore first-time homebuyer grants and loans in your area.
401k/IRA withdrawals – You can use retirement savings without penalty for a first home.
Seller assistance – Negotiate with the seller to cover closing costs or points.
Lender credits – Agree to a slightly higher rate in return for lender credits.
Down payment loans – Special mortgage programs finance down payments with a second loan.

Consider both the pros and cons of each option for your unique situation.

Bottom Line

While paying off student loans before buying a house may seem like the responsible path, for many borrowers it’s possible to achieve both goals simultaneously. The keys are optimizing your DTI, maintaining a strong credit score, budgeting carefully, and exploring flexible mortgage options.

With careful planning and preparation, you can leverage student loans to cover your down payment while also continuing to chip away at your education debt after purchasing your home. The sense of pride and accomplishment from buying your own house makes it a worthwhile journey.

FHA Loans

The Federal Housing Administration (FHA) provides mortgage insurance on loans made by special FHA-approved lenders under the HUD umbrella. These lenders are willing to make FHA home loans with lower down payments because of the government guarantee. Unlike conventional mortgages, you may be able to secure a loan as a student with as little as 3.5% of the purchase price to put as a down payment. This, of course, depends on which state youre seeking to make the purchase.

FHA loans may also give you a lower interest rate. Most of these mortgages come with a fixed interest rate, allowing people—including students who qualify—to finance as much as 96.5% of the purchase price of the home. This helps cut down on extra costs like closing costs. It can also help keep your mortgage payments down. You may also qualify for the 203(b) home loan, which allows you to fund 100% of the closing costs from a gift from a relative, government agency, or a nonprofit.

You can look up the FHA mortgage parameters on the HUD website.

Home Buying Programs

The U.S. Department of Housing and Urban Development—also called HUD—is charged with creating strong communities with affordable housing for everyone. Created in 1965, the government agency improves homeownership opportunities at more affordable levels. HUD has an abundance of resources as well as special programs for first-time homebuyers. It also provides homebuyers with state-specific programs for anyone looking to buy a home.

Buying a House with Student Loans | Student Loans and Buying a House | First Time Homebuyer

FAQ

Is it smart to use to student loans to buy a house?

Student loans are meant to help college students pay for education expenses. But some people get the idea that they can use student loan funds for anything, like buying assets; this is a dangerous practice with many downsides.

Can you use student loans for a mortgage?

If you have higher student loan rates, you can refinance the debt into your mortgage and save money on interest. But this comes at a cost. If you stretch out the loan term, such as a 30-year term, make sure the total interest you’ll pay won’t exceed what your student loans would have cost.

Can you buy a house with 200k student loan debt?

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.

Can a student loan be used for housing?

If you decide living off campus is best, you can use your student loans for housing costs. Just know that you’ll be paying interest on that rent down the road.

Can you buy a house with student loans?

Can you buy a house with student debt?

Look at your DTI ratio. You can still buy a home with student debt if you have a solid, reliable income and a handle on your payments. However, unreliable income or debt payments may make up a large amount of your total monthly budget, so you may want to consider paying down student loans or other debts before buying a house.

Can I buy a home with outstanding student 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.

Can student loan debt make buying a home harder?

However, having student loan debt can make buying a home more difficult, as lenders will review your financial situation, including how your debt compares to your income, to ensure you can repay your loan. Student loan debt impacts your debt-to-income (DTI) ratio, which lenders use to evaluate you as a borrower.