Getting a Mortgage with Student Loans

For countless Americans, student loan debt can be a barrier when thinking about getting a mortgage. One in four Americans under the age of 40 have student loan debt. Therefore, student loan debt is a major factor that lenders consider when evaluating applicants for a mortgage.

Can You Get a Mortgage with Student Loans?

Getting a mortgage is possible even if you’re shouldering student loan debt. When you apply for a mortgage, lenders take a close look at your overall debt picture, which is called your debt-to-income ratio. This figure represents the portion of your monthly income that goes toward paying debts. Student loans are a part of this calculation, impacting the ratio and, consequently, how much mortgage you could qualify for.

Lenders will also review the status of your student loans. If they are in deferment, forbearance, or repayment, that could have different implications on your mortgage application. In some cases, even a $0 monthly payment in an income-driven repayment plan can influence lender calculations.

You can use a mortgage affordability calculator with student loans factored in to better understand your potential mortgage amount. This tool will help estimate how much you could potentially borrow.

Options for a Mortgage with Student Loan Debt

Conventional Loans

These loans are the most common type for homebuyers and are offered by private lenders. Conventional loans typically require a minimum down payment of 3 percent for eligible borrowers. While student loans might affect the debt-to-income ratio, maintaining a strong credit score can offset some concerns. These loans often have slightly stricter credit requirements than government-backed loans, so borrowers must maintain good financial health.

FHA Loans

Backed by the Federal Housing Administration, FHA loans are popular for first-time homebuyers and those with lower credit scores. They require a down payment as low as 3.5 percent, making them accessible to those who might otherwise struggle to save for a higher down payment due to student loan repayments. FHA loans also tend to be more lenient regarding DTI ratios, providing flexibility to borrowers carrying student debt.

VA Loans

Available to veterans, active service members, and eligible family members, VA loans are a compelling option due to their benefit of no down payment requirement. VA loans are guaranteed by the U.S. Department of Veterans Affairs and do not require private mortgage insurance (PMI). The accommodating nature of VA loans in terms of credit and income requirements makes them an excellent choice for service members managing student debt.

USDA Loans

USDA loans are aimed at rural and suburban homebuyers who meet specific income requirements. Offered by the U.S. Department of Agriculture, these loans also feature no down payment requirements and favorable interest rates. They are suitable for individuals with student loans who are considering purchasing a home outside of major metropolitan areas.

How to Prepare for Applying for a Mortgage with Student Loan Debt

For prospective homebuyers managing student loan debt, improving the debt-to-income (DTI) ratio is the most important thing you can do before applying for a mortgage. The DTI ratio, which lenders use to evaluate your ability to manage monthly payments and repay debts, should ideally be 45 percent or less; however, some lenders might allow slightly higher DTIs depending on individual circumstances. Here’s how you can work towards improving your DTI:

• Lower high-interest debts such as credit card balances. By reducing these amounts, you can lower your total monthly debt obligations, effectively improving your DTI.
• Boost your income. This could involve asking for a raise, taking on additional hours at work, or starting a side hustle.
• Consider enrolling in income-driven repayment plans, which may reduce your monthly payments or, in some cases, show as $0 payments. Such arrangements can favorably affect your DTI calculation.
• Before applying, organize all necessary financial documents, including proof of income, tax returns, and a comprehensive list of debts. Review your credit reports to ensure accuracy.

Remember, thorough preparation and informed planning are key to overcoming the obstacles of your student loan to a mortgage. By focusing on these strategies, you can enhance your DTI and present yourself as a well-prepared and credible candidate to buy a home despite your student loans.