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The financial burden of student loans might be putting homeownership out of reach for some graduates. According to a recent Credible analysis, the average student loan debt in the U.S. is $33,654, with approximately 2.8 million borrowers owing $100,000 or more.
But buying a house with student loan debt is possible, as long as the monthly payment fits within your budget and you’re OK with taking on the debt. There are even assistance programs that can help.
Here’s how to buy a house when you have student loan debt:
- Review your credit
- Lower your DTI
- Consider down payment assistance
- Look into first-time homebuyer programs
- Get pre-approved
1. Review your credit
Your credit score plays a big role in whether you qualify for a mortgage loan and get a low interest rate. The most popular credit scores, FICO and VantageScore, range from 300 to 850. The best home loan rates generally go to borrowers with a credit score around 700 or above, though you may still qualify for a mortgage with a lower score.
If your credit score needs work, check your credit reports to see where you can improve. Paying your student loans on time is a good way to build credit and increase your credit score. You can also:
- Pay every bill on time. Payment history is the most important factor in your credit score — so aim to pay every bill by or before the due date. Setting up automatic reminders can help you remember.
- Lower your credit utilization ratio. Your credit utilization ratio measures how much of your total available credit you’re using. Generally, using less is better for your credit score. To help lower this metric (and increase your score), you can pay down some of your loans and keep your credit card balance under 30%.
- Keep credit cards open. Having a long credit history can help boost your credit score, so think twice before closing any credit cards.
- Avoid opening new credit accounts. Don’t apply for new credit cards or loans as you prepare to buy a home. These require hard credit inquiries, which can negatively impact your score.
- Check your credit reports often. If you spot errors or suspect fraud, contact your creditor and then report it to the bureau.
In the example below, you can see how much in interest you could save over the course of a loan by having a good credit score.
| Credit score | Interest rate | Monthly payment | Total interest paid |
|---|---|---|---|
| 760-850 | 2.577% | $798 | $87,378 |
| 700-759 | 2.799% | $822 | $95,806 |
| 680-699 | 2.976% | $841 | $102,624 |
| 660-679 | 3.19% | $864 | $110,982 |
| 640-659 | 3.62% | $912 | $128,154 |
| 620-639 | 4.166% | $974 | $150,665 |
| Note: All numbers here are for demonstrative purposes only and do not represent an advertisement for available terms. This example is based on a $200,000, 30-year loan and the interest rates as of August 13, 2020. Calculations were made using the MyFico loan savings calculator. | |||
2. Lower your DTI
When buying a house while carrying student loan debt, you need to know how the mortgage payment will affect your debt-to-income ratio, which measures how much of your income goes toward total debt payments. To calculate this, simply add up your total debt payments and divide by your monthly gross income.
Mortgage lenders calculate two types of DTI. Your front-end DTI ratio only includes your housing costs, while your back-end ratio includes all debts.
- Back-end ratio: ($1,200 + $300 + $250) / $5,000 = 0.35 or 35%
- Front-end ratio: $1,200 / $5,000 = 0.24 or 24%
The DTI requirement varies with each lender and mortgage program, but a back-end ratio under 43% can help you qualify and get a good mortgage rate.
If your DTI is on the higher end, you can take these steps to improve it:
- Pay down your credit card balances.
- Pay down other outstanding debts, such as a car loan or personal loan.
- Increase your income.
- Look for cheaper homes so you can lower your housing budget.
- Refinance your student loan, which can lower your monthly payment.
If you choose to refinance your student loan, be sure to consider as many refinancing lenders as possible to find the right loan for you. Credible makes this easy — you can compare your rates from all of our partner lenders in just two minutes.
See Your Refinancing Options
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3. Consider down payment assistance
A down payment is the amount you must pay upfront when you buy a home, calculated as a percentage of the home’s value. First-time homebuyers made a median down payment of 6% in 2019, according to the National Association of Realtors.
It can be hard to save for a down payment if a student loan payment is hogging most of your available funds. But a few federal loan programs can help shrink the down payment requirement, even if you have student loans:
- FHA loans, which are backed by the Federal Housing Administration, require as little as 3.5% down if your credit score is at least 580.
- Service members, veterans, and surviving spouses may qualify for a no-down-payment loan through the Department of Veterans Affairs.
- If you choose to live in a rural area, you may qualify for a loan backed by the U.S. Department of Agriculture. They typically come with no down payment.
- You may put down as little as 3% on certain conventional loans, although you’ll pay private mortgage insurance (PMI) until your loan-to-value ratio drops below 80%.
Learn More: How Much Does It Cost to Buy a Home?
4. Look into first-time homebuyer programs
Don’t forget to look into programs for first-time homebuyers, which help make homebuying easier and more affordable.
- Down payment assistance through grants, forgivable loans, or payment-deferred loans.
- Closing cost assistance that offsets the amount of money you need at the closing table.
- Tax credits through certain state and local governments.
- Homebuyer education programs that help you understand your loan options, the buying process, and how to apply for a mortgage.
Some states even offer homeownership programs specifically for people with student loans. For each program, check eligibility requirements before applying. You may need to meet income requirements, be a first-time homebuyer, or live in the home for a certain number of years.
Find Out: What Is a Mortgage Rate and How Do They Work?
5. Get pre-approved
After reviewing your finances and checking out homebuyer programs, getting a mortgage pre-approval is a good next step. A pre-approval is a letter from a lender that shows about how much you can borrow and your estimated monthly payment. This can help you stay within your budget and show sellers you’re serious when you make an offer.
Credible can help you get pre-approved in just three minutes. Check out the table below to see how our process differs from that of traditional lenders.
| Traditional lenders | Credible | |
| How long does it take? | 1 to 3 days | 3 minutes |
| Credit check | Hard credit pull (negative impact on your credit) | Soft credit pull (no impact on your credit) |
| Online process | Typically minimal; instead processed via in-person visit at a branch or phone call with a licensed loan officer | 100% online |
| Compare multiple lenders? | No, visit multiple lenders to receive multiple pre-approval letters | Yes, pre-approved across multiple lenders at once |
| Multiple pre-approval letters to make additional property offers? | No, must submit another request to lender for new pre-approval letter | Yes, generate additional letters instantly with a customized loan amount |
Ready to get pre-approved through Credible? |
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Check mortgage rates:
Should you buy a home if you have student loan debt?
Buying a home is a big decision that depends on multiple factors. You don’t need to pay down your entire student loan before taking on a mortgage, as long as you’re comfortable with the extra debt.
Whether or not you should buy a home is up to you, but by following the steps above and preparing for the loan, you’ll be able to smartly fit the monthly payment in your budget.
Credible makes comparing multiple lenders quick and easy. You can see your rates from our partner lenders in the table below in three minutes.
