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Graduating from college with a mountain of student loan debt is an increasingly common experience. In fact, the average student loan debt is now over $30,000.
This burden can feel overwhelming when you’re also trying to pay rent or a mortgage, build savings, and cover other living expenses on a limited entry-level salary.
Some homeowners look into the option of using student loans to pay their mortgage. This tactic could lower your monthly bills and let you pay off debt faster. But it also carries serious risks.
Let’s look at the pros, cons, and steps for using student loans for your mortgage I’ll also suggest a few alternative debt payoff strategies By the end, you’ll know whether this route could work in your unique situation.
Can You Use Student Loans for a Mortgage Payment?
First, is it even possible to use a student loan to cover your mortgage? The short answer is yes, if you meet certain criteria.
There are a couple ways to access student loan funds for mortgage payments:
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Take out a new private student loan in excess of your school costs. Use the leftover money to pay additional principal on your mortgage.
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Refinance your federal or private student loans. Choose a longer-term loan and take some of the proceeds as cash to pay ahead on your mortgage principal.
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Refinance your mortgage into a cash-out refinance loan. Pay off student loan debt with the proceeds.
These tactics all allow you to consolidate student loan and mortgage debt. Your goal is to reduce the interest rates and monthly payments so more money goes toward paying down principal.
Now let’s go over the key pros and cons of using student loans for mortgage payments. This can help you decide if it aligns with your financial situation and goals.
Pros of Using Student Loans for Mortgage Payments
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Lower monthly bills Combining debts into one loan with a lower rate saves money each month This frees up cash flow for other goals
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Pay off debt faster: Putting extra money toward your mortgage principal from student loans pays the balance down quicker.
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Lower interest costs: Student loan interest rates are often higher than mortgage rates. Refinancing reduces total interest.
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One payment: Consolidating debts into a mortgage makes budgeting easier with a single monthly bill.
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Interest may be tax deductible: Mortgage interest is often tax deductible, while student loan interest usually isn’t.
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Access home equity: Tapping equity through a cash-out refinance provides funds to pay student loans.
For these reasons, using student loans strategically for a mortgage payment can accelerate debt payoff. Next, let’s look at the potential drawbacks.
Cons of Using Student Loans for Mortgage Payments
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Higher monthly mortgage payment: Even with a lower rate, a bigger mortgage balance equals a larger monthly payment.
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Higher risk of default: If the payment jumps too much, it raises the odds you could default on the mortgage.
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Less flexible repayment options: Federal student loans offer income-based repayment and forgiveness programs that private loans lack.
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More interest costs overall: Stretching out the term on debt to lower payments adds to total interest.
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Closing costs for refinancing: Refinancing into a mortgage or cash-out refinance comes with upfront closing fees.
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Difficult to qualify: Lenders have stricter income and credit requirements for larger cash-out refinance mortgages.
As you can see, using a student loan for mortgage payments lets you tap into funds now at the cost of less flexibility and more interest later. Make sure you understand these tradeoffs before moving forward.
Steps for Using Student Loans for Mortgage Payments
If you decide consolidating student loan and mortgage debt could benefit you, here are the basic steps:
1. Check you meet eligibility criteria
Lenders will evaluate your credit, income, assets, and debts to ensure you qualify for the new, larger mortgage payment. Requirements vary by loan type but generally include:
- Credit score of at least 620
- Total debt-to-income ratio below 50%
- Loan-to-value ratio 80% or lower
- At least 20% equity in the home
2. Calculate potential savings
Figure out the savings from lowering your interest rate and consolidating debts. Make sure it exceeds closing costs.
3. Pick the right loan product
Choose from a private student loan, student loan refinance, traditional cash-out refinance, or Fannie Mae Student Loan cash-out refinance.
4. Submit your application
Apply for the selected loan and provide all required documents to the lender. This includes pay stubs, tax returns, and bank statements.
5. Close on the loan
At closing, your old debts will be paid off. You’ll make one new monthly mortgage payment going forward.
If you carefully consider risks and have the financial profile to qualify, using student loans for mortgage payments can be a strategic debt payoff move.
Alternatives to Using Student Loans for Your Mortgage
However, consolidating debts into your mortgage is not the only option. Here are a few other tactics to consider:
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Refinance just the student loans separately, if this reduces the interest rate.
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Enroll student loans in an income-based repayment plan to lower monthly bills.
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Apply for student loan forgiveness programs if you qualify through your employer or the government.
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Prioritize paying extra each month on the debt with the highest interest rate first.
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Use a balance transfer credit card with a 0% intro APR to pay off credit card or student loan debt faster.
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Take out a personal loan to consolidate and pay off credit card balances and other debts.
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Boost income with a side business or part-time job to free up more cash.
The right path depends on your specific student loan and mortgage details. Run the numbers for a few different scenarios to see which creates the most interest savings and fastest payoff.
Using Student Loans for a Mortgage: The Bottom Line
While risky, using student loans to pay down your mortgage faster may make sense in certain situations. The key is running the calculations to ensure lower interest costs and monthly bills outweigh the closing fees and reduced flexibility.
I recommend having a solid emergency fund, strong credit scores, and extra income before consolidating debts into your home loan. There are also other effective debt payoff methods like balance transfers and refinancing to consider first.
But for some homeowners, strategically tapping student loan funds for extra mortgage principal payments can provide debt relief. Just be sure to understand the pros, cons, and alternatives before moving forward.
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How student loans impact your DTI ratio
Student loan debt is often considered in your DTI ratio, a formula mortgage lenders use to help assess your creditworthiness as a borrower. This ratio is calculated by dividing your monthly debt payments by your monthly gross income, which yields a percentage value that lenders then use to evaluate your ability to repay a mortgage.
If you have car loan and student loan payments, for instance, a mortgage lender will add those to your proposed mortgage payment, then divide that total by your gross monthly income. In general, the result shouldn’t exceed 43 percent, but some lenders look for a lower ratio, 36 percent, while others might accept up to 50 percent.
“Maximum DTI ratios are typically set at 43 percent, depending on whether it’s a government-backed loan or not,” says Leslie Tayne, a debt relief attorney in Melville, New York. “That means your monthly debt obligations divided by your monthly income should not exceed 43 percent for best odds of loan approval. Those with higher incomes, lower loan amounts and lower overall debt will have a lower DTI ratio, increasing your odds of loan approval.”
| DTI ratio | What lenders think |
|---|---|
| Below 36% | Good: You probably have the financial capacity to handle more debt. |
| 36% to 49% | OK: It’s unclear whether you could handle more debt. |
| Above 49% | Poor: You likely can’t handle more debt. |
Life Hack- How to Use your Mortgage to Pay off your Student loans!
FAQ
Can you use a student loan to pay a mortgage?
Can you buy a house with 200k student loan debt?
Do student loans count as income for 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.
How do I get a mortgage with student loans?
Here’s what to know about getting a mortgage with student loans. Your DTI gives the strongest indication of your ability to repay a mortgage. The lower your DTI ratio, the better your chances of approval and of getting a low interest rate. There are two types of DTI ratios — back end and front end.
Can you get a loan as a student?
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 you’re seeking to make the purchase. FHA loans may also give you a lower interest rate.
Do student loans count as monthly payments?
Here’s what lenders are required to count as your student loan monthly payment as of mid-to-late 2023. Conventional loans sponsored by Fannie Mae and Freddie Mac make up the overwhelming majority of mortgages issued. Conventional loans allow you to get a mortgage with student loans with as little as 3% down and a credit score of 620.
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).
Can I get a mortgage if I’m paying off student loans?
Here’s an explanation for Even if you’re paying off student loans, it’s 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.