This article will look at how your student loan debt affects your ability to get a home mortgage. It will explain how mortgage lenders look at your debt when evaluating you as a prospective borrower and explore other factors they consider. Finally, the article will discuss the types of loans you may qualify for.
The numbers are stunning. According to the Education Data Initiative, 43 million Americans carried student loan debt in 2021, with the average debt per borrower at $37,693.
If you’re one of those millions, you might be wondering if this is the right time to buy a home. You might even be asking the question, “can you get a mortgage with student loans?”
The good news is that it is possible to get a mortgage with student loan debt. You need to meet certain conditions related to your debt-to-income ratio (we’ll explain more later in this article) and your credit history.
How high student loan debt affects getting a mortgage
The simple fact that you have student loan debt shouldn’t necessarily prevent you from getting a mortgage. Having a high amount of overall debt, however, may make things difficult.
Why? Because lenders need to be confident that you’ll have enough money to make your new home loan payments once you’ve been approved for a mortgage and are in your new home. The more monthly debt payments you have — whether in the form of student loans, car loans, credit card debt, or other sources — the less confident lenders may be.
Understand your debt-to-income ratio
Lenders are looking to understand your total outstanding debt, regardless of the source, and how it compares to your income. This is your debt-to-income ratio (DTI).
You can roughly calculate this ratio yourself.
Step 1: Add your monthly regular, recurring, and required debt payments.
These may include the following:
- Your monthly housing costs, including your rent or current mortgage payment
- Your homeowner’s insurance or renters’ insurance payment
- Your minimum monthly student loan debt payments (only the minimum required amount, which may be less than what you actually pay)
- Your minimum credit card payment (again, only the minimum required amount)
- Your auto loan payment
- Any other personal loan payments
- Any court-ordered back taxes, alimony or child support payments
Note that you shouldn’t include optional and variable expenses, such as your utility bills, transportation costs or entertainment.
Step 2: Determine your gross monthly income (pre-tax).
You can get this from your recent pay stubs or W2 forms.
Step 3: Divide your payments by your income.
So, let’s say you’re making $2,000 in monthly debt payments and that your monthly pre-tax income is $5,000.
$2,000 (monthly debt) / $5,000 (monthly pre-tax income) = .40, or 40%
And with a 40% DTI, you’d be in good shape. That’s just under the 43% threshold that most large lenders require for a qualified mortgage.
But if your current DTI is above 43%, don’t panic. There are things you can do to lower your DTI, and some types of mortgage programs are available to those with a higher DTI ratio. We’ll look at that later in this article.
How lenders look at your credit history
Your credit score and credit history also factor in when you’re applying for a home mortgage. Again, this is true regardless of whether you carry student loan debt.
As with DTI, lenders are interested in your credit score because it indicates your ability to make your mortgage payments and repay your debt obligations. The most significant single factor making up your score is your payment history, followed by the amount of debt you have. This is where carrying high amounts of student loan debt might impact your score. Generally, you can get approved if your FICO credit score is above 580, assuming you meet other loan requirements. A higher credit score might help you qualify for a better mortgage rate and more favorable loan terms.
Want to learn more? Checkout this article on how your credit history affects your mortgage rate.
Student loan debt and your mortgage rate
A common question is, “does student loan debt affect my mortgage rate?” Under certain circumstances, having high student loan debt can indeed affect your rate. But it depends on how you handle that debt.
Understand that a lender will typically extend its best mortgage rates to the most financially attractive potential borrowers, with the lowest risks for not missing payments. High levels of student loan debt — or high levels of any type of debt — may affect your debt-to-income (DTI) ratio. This may cause a lender to look less favorably on you as a borrower and may prevent you from qualifying for a loan in the first place. Repeatedly missing or making late loan payments can negatively affect your credit score, which may, in turn, negatively affect your chances of getting a good mortgage rate or even approved for a home loan. Lastly, needing to make high student loan payments will likely affect your ability to save money for a significant down payment, which may also negatively affect your ability to get a low interest rate.
This article from the Consumer Financial Protection Bureau explains more about how lenders determine your mortgage interest rate.
Types of home loans available to those with student loan debt
As a prospective homebuyer with student loan debt, you have multiple mortgage loan programs to explore. Some have less restrictive requirements for DTI and credit than others and may be options that will work for your financial situation.
Here are few examples:
- Conventional loans. The most common type of mortgage, conventional loans are available with fixed and adjustable rates and terms ranging from 15 to 30 years. These loans also offer down payments as low as 3% but require private mortgage insurance (PMI) if the down payment is less than 20% of the home’s purchase price. Note that the monthly cost of the PMI will factor into your DTI ratio. Conventional loans also typically require a minimum credit score of at least 620.
- FHA loans. These are insured by the U.S. Federal Housing Administration. The FHA first-time homebuyer program allows down payments as low as 3.5% and a credit score as low as 500. In some cases, you can qualify for an FHA loan with a DTI ratio above 43%, as long as you have a higher credit score. Learn more about FHA loans.
- VA loans. Insured by the Department of Veterans Affairs and issued by conventional lenders, VA loans are intended for eligible active members of the U.S. armed services, veterans and surviving spouses. Credit score and DTI requirements vary by lender but are often less restrictive than those needed for a conventional loan. Learn more about VA home loans.
- USDA loans. If you live outside of a metropolitan area, you might qualify for a mortgage issued through the U.S. Department of Agriculture Rural Development Guaranteed Housing Loan Program. USDA loans offer zero down payments and a qualifying DTI of 41%. The program will consider higher DTI ratios for those with credit scores above 680. Learn more about USDA loans.
Is it better to wait until your high student loan debt is paid off?
Buying a home is a significant step and will be one of the biggest investments you ever make in your financial life. By no means is student loan debt a barrier to buying a home, but having too much debt overall can hamper your ability to qualify for a mortgage.
You always want to have a stable financial situation before you buy a home. Be sure that you have steady income, that you’re paying your bills on time and are working to pay down your student loan and other debts, and that you have money set aside for a down payment. If your financial situation is a little less sure at this point, it may make sense to wait.
The Consumer Financial Protection Bureau offers support and tips to help you pay off student loans.
Tips to qualify for a home mortgage
Fortunately, you can do a few things to take control of your financial situation, make yourself more attractive to mortgage lenders, and get yourself on the path to homeownership.
- Reduce your debt — Work to pay off your student loans and other debts. Lowering the numerator in the DTI formula will help reduce your ratio.
- Increase your income — Conversely, raising your DTI’s denominator will also help you reduce your ratio. Consider working additional hours at your job, finding a side gig, or asking for a raise.
- Check your credit report — You can check your credit report once per year for free, online, at annualcreditreport.com. The U.S. Federal Trade Commission authorizes the site as a source for free credit reports.
Once you have your report in hand, make sure there are no irregularities. If you find any issues, contact the issuing credit bureau to start their resolution process. And be sure you make your payments on time, including your student loan payments. Experian offers these additional tips to improve your credit score.
- Investigate alternative mortgage options — As mentioned above, you have government-backed mortgage options such as FHA, VA, and USDA, aside from conventional loans. These might provide less restrictive loan qualifications that will work with your current financial situation and are often a viable path for first-time homebuyers.
- Get prequalified — A mortgage prequalification is an estimate of what you might be able to borrow based on the information you provide about your finances and a credit check. While not as thorough as a formal mortgage application, prequalification can help you better understand your current ability to afford a home.
If you have high student loan debt, it may take time before you’re ready to buy a home. But have patience and work on your financial situation, and one day the dream of homeownership can be your reality.