Can I Buy a House with Student Loan Debt?
Feb 07, 2023
Maybe you’ve spent years paying down your student loans, but you still have a balance. Or, perhaps you’re a new graduate who hasn’t started paying off your loans. You’re ready to become a homeowner, but you wonder if it’s possible to buy a home when you have student loan debt.
Fortunately, your student loans do not have to be paid off in order to buy a house. While your student loan may affect your mortgage terms and the amount you’re approved for, you can still get approved for a mortgage and realize your dreams of homeownership. Here’s what you need to know.
What Lenders Look at When Approving a Mortgage
When deciding whether to approve a lender for a mortgage, lenders look at several different factors. Your student loan debt will impact several of the items that lenders examine when deciding to approve a home loan:
Your Debt-to-Income Ratio
Your debt-to-income ratio examines how much of your income you’re spending on debt payments and housing expenses. A general rule is that your housing expenses shouldn’t exceed 28 percent of your gross income, and your total debt payments shouldn’t be more than 36 percent of your gross income. This increases your chances of qualifying for a mortgage and helps you qualify for the best interest rate and loan terms.
Student loan debt can definitely affect your debt-to-income ratio. As an example, let's assume you have a gross monthly income of $5,000. Let's assume your student loan payment is $400 a month and your minimum payment for your credit card is $200 a month. Using the 28/36 guidelines, your potential housing costs shouldn’t exceed $1,400 and your total debt payments should be $1,800 or less. Since your total debt payments are $600, this leaves you with $1,200 to spend on housing. Even though the 28 percent guideline states that you can spend more on a home, this amount decreases due to your other debt payments. Options for increasing your purchasing power include paying down your total debt, increasing your income, or refinancing your student loan to reduce your monthly payment.
Your Credit Score
Your credit score is another factor that influences your ability to secure a home loan. The higher your credit score, the better your chances of securing a mortgage with a low interest rate and favorable terms. To keep your score as high as possible, make sure to always pay your bills on time; this includes your student loan payments. Avoid using more than 35 percent of the available balance on your credit cards and credit lines. For example, if you have three credit cards with a combined balance of $10,000, keep your balance at $3,500 or less. Try to have a mix of credit that includes revolving credit (like credit cards or lines of credit) and installment loans (this includes student loans, car loans, and personal loans) to optimize your credit score. Before you apply for a mortgage, go over your credit report to make sure that all the information is accurate. Info that’s outdated or incorrect can lower your credit score.
How to Start the Homebuying Process
Before you start shopping for a house, you need to know how much home you can afford. Your Premier mortgage advisor can pre-approve you for a mortgage to provide you with an estimate of the loan amount they will approve you for. This ensures that you’re looking at homes within your budget. Lenders typically look at your employment history, credit report, assets, preferred downpayment amount, and income. Your student loans will be included in those calculations and will affect your debt-to-income ratio, even if the loans are currently in deferment.
So can you buy a house with student loan debt?
Yes, you can buy a house with student loan debt. However, having student loan debt can impact your ability to get approved for a mortgage, as it may affect your debt-to-income ratio, which is a key factor that lenders consider when evaluating a loan application. To increase your chances of getting approved for a mortgage, you may want to consider paying off as much of your student loan debt as possible and improving your credit score before applying for a mortgage.