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You can buy a home with student loan debt, but it might be more challenging than if you were otherwise debt-free. Like any significant amount of debt, student loan debt can make it more difficult to qualify for and manage a mortgage.
Before you apply for a mortgage, take a hard look at your budget and expenses to confirm you’ll be able to balance your new mortgage and monthly student loan payments with enough room to spare.
How to buy a home with student loan debt
Regardless of your financial situation, buying a home can be complicated, with a lot of steps. Here’s the basic process.
Check your credit
When you apply for a mortgage, your mortgage lender will check your credit. Credit reports and scores help lenders determine if you’ll get a loan and what interest rate you’ll pay.
Your first step should be to request your credit reports and examine them carefully for any errors. Look at your credit score too — if it’s below 620, you may want to work on your credit before buying a home.
Know your DTI
Your debt-to-income ratio measures all your monthly debt payments compared to the money you make. It’s an important number lenders use to determine whether you can afford a mortgage payment.
Keep in mind that a ratio of 43% or higher — after your potential new monthly mortgage payment is factored in — is considered to be risky, and some loan programs have maximum DTI ratios.
Research first-time homebuyer programs
If this will be your first time buying a house, a multitude of state and federal programs exist to help you afford it — even with student loan debt.
State and local governments may include down payment assistance or tax credits that can make buying your first home easier. Down payment assistance for a first-time homebuyer may be structured as a grant or a deferred loan that can be forgiven over time or paid back when you sell the home.
Get pre-approval before you start home shopping
When you get pre-approved for a mortgage, a lender generally checks your credit and lets you know how much it might lend you and on what terms. It’s not a binding offer, but it gives you a good idea of how much you might be able to afford..
You can compare mortgage rates from multiple lenders and generate a pre-approval letter through Credible.
Mortgages for borrowers with student loan debt
For people with excellent credit, a conventional mortgage is often the best deal. It offers lower interest rates than many other types of mortgages, and down payments as low as 3%. But if your student loan debt has negatively affected your credit, a conventional loan might not be a good option for you. Here are a few other mortgage programs to consider.
FHA loans
The federal government insures FHA loans, which private lenders offer. FHA loans offer down payments as low as 3.5% for people with a credit score of 580 or above — below the threshold for conventional loans. You can qualify for an FHA loan with a score as low as 500 if you can make a 10% down payment.
Be aware that FHA loans require you to pay a mortgage insurance premium for the life of the loan, which will add to your costs. You won’t be able to drop the insurance payment without refinancing, as you can with private mortgage insurance on a conventional loan.
VA loans
This mortgage program benefits military service members, veterans, and their families, and offers the ability to buy a home with no down payment.
If you qualify for a VA loan, you also won’t need to pay a monthly insurance premium, and there are no hard-and-fast DTI maximums or credit score minimums. Instead, lenders will evaluate your entire financial picture to make sure you can afford the mortgage.
But be sure to factor in the funding fee associated with many VA loans as you calculate what loan works best for you.
USDA loans
These mortgages are designed to help low- to moderate-income people living in certain rural areas. They also offer the ability to buy a home with no down payment.
Specialty state and local programs
Depending on where you live, your city or state may offer subsidized loan programs to help you buy your first house.
You may qualify based on your income, or you may qualify for programs for teachers, firefighters, or other public servants. These programs often include down payment assistance or lower interest rates than you might normally qualify for.
Qualifying for a mortgage with student loan debt
Mortgage lenders carefully scrutinize the finances of anyone applying for a mortgage, but if you have student loan debt you might get a closer look. Here are a few tips on improving your chances of qualifying for a mortgage with student loan debt.
Improve your DTI
Your monthly student loan payments are counted as part of your debt-to-income ratio.
To figure out your DTI, start by adding up all your current monthly debt payments. Factor in a mortgage payment as well (use a mortgage calculator to help you figure out what this might be). Finally, take that number and divide it into your gross monthly income — the amount you earn before your taxes and deductions are taken out.
The larger your student loan payment, the higher your DTI will be. If you have high-interest student loans, you may be able to consolidate and refinance into a single student loan with a lower interest rate or a longer term, reducing your monthly payment and thus your DTI.
But keep in mind that refinancing into a longer term will likely increase the lifetime interest costs of your student loans.
If you’re considering refinancing your student loans, Credible makes it easy to compare rates from multiple lenders.
You can also work to improve other parts of your DTI. Paying off credit card debt, car loans, and personal loans will all help reduce your monthly debt payments and lower your DTI. Be wary about adding any additional debt if your goal is to qualify for a mortgage.
Improve your credit
Boosting your credit score will also improve your chances of being approved for a mortgage if you have student debt.
First, review your credit reports for any errors you can dispute. You’re entitled to a free copy of your credit report each year from the three major credit bureaus — Equifax, Experian, and TransUnion. You can request copies at AnnualCreditReport.com. You may find accounts listed as open that are actually closed, incorrect balances, or items listed as delinquent that are paid in full. Fixing these problems may give you a higher score.
Beyond that, though, there are no quick fixes. The best way to improve your credit score is to focus on making all your credit card payments on time — every time. Late payments negatively affect credit scores.
You can also pay down credit card balances (consider making more than the minimum payments to free up available credit) and only apply for credit you actually need.
Reassess your payment plan
Depending on the type of student loan you have, you may be able to change your payment plan to make it easier to qualify for a mortgage. If you have federal student loans and are in a standard repayment plan, you may be able to switch to an income-driven repayment plan, graduated repayment plan, or extended repayment plan to lower your monthly payment and improve your DTI.
Is buying a house with student loan debt a good idea?
Everyone’s situation is unique, so you’ll have to decide for yourself whether it’s a good idea to buy a house with student loan debt. But a few questions could help guide your decision.
- What are my financial priorities? If your goal is to be mostly debt-free, it may be worth paying down your student loan balance before considering a mortgage loan. If homeownership is your top priority, you might consider rearranging your student loan debt to make it happen.
- How well am I managing my current debt load? If you already feel stretched thin by your student loan debt, taking on a major financial commitment like a mortgage might not be a good idea.
- Will I be able to afford closing costs and the costs associated with home ownership? Keep in mind that there are a number of costs associated with owning a home beyond the mortgage payment — from repairs to insurance to homeowners’ association dues. Closing costs also require you to have a substantial amount of cash on hand to get your home loan.Will buying a home significantly improve my financial health and overall well-being? If the answer is yes, it might be worth the effort. If it’s no, consider waiting.
You can learn more about mortgages, rates, and the application process by visiting Credible.
About the author: Andrew Dunn is an award-winning mortgage and finance writer with a decade of experience in covering personal finance. He’s written for LendingTree, where he was previously managing editor for mortgage content, Credit Karma, Business North Carolina magazine and the Charlotte Observer. His work has been recognized by the Society of American Business Editors and Writers, and the N.C. Press Association.