Student loan debt has long been seen as a barrier to homeownership, but is it actually possible to buy a home with student debt? While having student loan debt may make the loan process a bit trickier, it doesn’t have to be a permanent obstacle to homeownership. Other factors include income, credit and other debts you may have, so it’s important to understand how each will affect the lending process. Here are a few things to know about obtaining a mortgage if you have student loan debt.
There are three main ways that student loans can impact your ability to obtain a mortgage with favorable terms. The first is your credit score, the second is your debt-to-income ratio and the third is your down payment.
Credit
Lenders will review your credit score, debt and payment history to determine whether or not you are a favorable candidate for a mortgage. Your credit score is an analysis and summary of your credit history. Payment history for your student loans may impact your credit score if you’ve missed payments.
Lenders may be more cautious when arranging terms for those with lower credit scores, and those borrowers may have a lesser chance of approval for a loan. Additionally, home loans for those with lower credit scores may come with a higher interest rate to offset the risk of lending to a borrower with a lower credit score.
By paying your student loans on time, you can improve your chances of obtaining a mortgage with better terms for your financial situation.
Debt-to-Income Ratio
The second way that your student loans can affect your ability to qualify for a mortgage is through your debt-to-income (DTI) ratio. Your DTI ratio shows what percentage of your income goes toward paying debts. To calculate your DTI ratio, add up all your monthly debt payments and divide by your gross monthly income, before tax. If your student loan is in deferment, depending on the loan program, a lender may still calculate a percentage of the outstanding balance to be considered in the DTI ratio, generally 1%.
How much money you earn and how much debt you owe helps lenders determine whether or not you can afford a mortgage at that time. Lenders will have a DTI threshold, and once that threshold is reached, a loan approval may not be granted. According to the Consumer Financial Protection Bureau (CFPB), you should try to keep your DTI under 43-45%. Borrowers with higher DTI ratios are more likely to have difficulty making monthly payments, according to the CFPB.
While student loans won’t necessarily be a key factor in obtaining a mortgage, the effect your student loans have on your DTI ratio will become a factor in your home loan search. It’s possible to get a mortgage even if you have a high monthly payment for your student loans, as long as you have little other debt and a good income.
If you don’t know what your options are with the amount of debt you owe, we can help you take a look at your finances and figure out the best course of action.
While maintaining a good credit score and keeping your DTI ratio within a lenders threshold are important for obtaining a mortgage, there is another way to improve your chances of qualifying.
Down Payment
You can increase your chances of getting approved for a mortgage by paying a higher down payment for your home. If you can save 10 or 20% or more for your down payment, the size of your student debt is much less likely to affect your ability to get a mortgage. However, there are other options for homebuyers who can’t afford a large down payment.
FHA loans are government-sponsored and are available with down payments as little as 3.5% if you qualify. For those who serve in the military, or who have served in the past, a no downpayment VA loans may be an option as they are guaranteed by Veterans Affairs to provide favorable terms to active or retired service members and their immediate families.
Qualifying for a mortgage while you’ve got student debt can be a bit more difficult, but it’s absolutely possible. Knowing all of the options available to you will help you better determine the type of loan that works with your financial needs, so be sure to speak with one of our qualified lending experts to make the best choice for you. For questions, concerns, and more information, feel free to give us a call. We’ll be happy to assist you.