Do Student Loans Affect Buying a House? What You Need to Know About Student Loans and Mortgages

You’re out of college, and you want to get started with the rest of your life—that often means buying a home. 

But will a lender even look at you? Do student loans and mortgages mix at all?

Homeownership is still achievable even with student loans. While your student debt will play a factor when you buy a house, we’re here to show you that it’s entirely possible that you can still buy a home and make it affordable. 

Student debt is everywhere

We’re sure we don’t need to tell you how burdensome student debt is. But let’s put into perspective how common this scenario is for home buyers. 

• On average, each ex-student borrower carries $37,338 in federal student loan debt
• Private student loan debt averages $54,921 per borrower
• Pursuing a bachelor’s degree often requires borrowing over $30,000
• Right now, private student loan debt outpaces federal debt in terms of growth rate
• 45.3 million borrowers hold student loan debt, with federal loan debt accounting for 92% of the total 
• Half of the student borrowers still owe $20,000 on their outstanding loan balances

The current administration has a new plan for student loan forgiveness that has not yet been finalized, but for the most part—students have been left on their own in terms of dealing with their debt. 

All of this is to say that lenders are no strangers to helping buyers achieve homeownership with student debt. 

How student debt is viewed by lenders

Let’s answer a crucial question right away: Zero debt is not a prerequisite for purchasing a home. 

Nevertheless, lenders will pay close attention to your existing debt—including any outstanding student loan balance—to ensure you have sufficient funds to make a mortgage payment. 

In the mind of the lender, the greater the amount of debt you carry, the greater difficulty you’ll likely have in keeping up with your payments.

Debt-to-income ratio and why it matters

When assessing your eligibility for a loan, lenders take into account a crucial metric known as your debt-to-income (DTI) ratio. 

This ratio shows the proportion of your monthly income that is allocated towards debt payments. Individuals with a high DTI ratio will likely encounter obstacles when applying for a mortgage but are not counted out entirely. 

Calculating your debt-to-income ratio

To effectively evaluate your financial situation (your DTI), follow these steps:

First, list all your regular, recurring debt payments for accurate calculations. 

Include the following in your DTI assessment:

• Your current rent or housing payment
• Monthly insurance payments
• Minimum credit card payments
• Student loan payments
• Auto loan payments
• Personal loan payments
• Court-ordered back taxes, alimony, or child support (if any)

Don’t count any variable expenses like entertainment, food, clothing costs, utility bills, transportation expenses, savings account contributions, retirement account contributions, and health insurance costs. 

While these are monthly expenses that should be accounted for in your personal monthly budget, a lender does not consider these costs as debts. 

Only account for the minimum required monthly payment for each loan. If your student loan balance is $20,000 but the minimum payment is $100, include only $100 in your DTI calculation.

Once you’ve listed all your recurring expenses, divide the total by your monthly pre-tax income. If you’re applying for a mortgage loan jointly with someone else, include their income and debts in the calculation. 

Multiply the result by 100 to obtain your DTI ratio as a percentage.

For example, if you add up all of your debts for a total of $1,000 and your income is $4,000, then you just divide $1,000 by $4,000—and your DTI ratio is 0.25 or 25%. 

Borrowers with a DTI ratio that exceeds 50% may be recommended to focus on debt reduction before pursuing a home purchase.

How to get a mortgage when you have student loans

The obvious solution to this problem is to pay off your student debt—but if you’re reading this article, we’ll assume that’s not feasible right now. 

So what can you do instead? The following options can enhance your odds of mortgage approval, even with your debts. 

Look at different mortgages

If your DTI ratio exceeds 50%, it’s possible that you won’t qualify for a conventional loan. 

Notice we said, possible. 

There’s still hope of purchasing a type of traditional home with a mortgage loan backed by the federal government (Freddie Mac or Fannie Mae). These programs minimize the risk of default for the lender and offer increased flexibility for approval. 

FHA mortgage loan

Consider an FHA loan, backed by the Federal Housing Administration, for potential financing. In many cases, you’ll find a maximum DTI ratio of 57% is allowed for an FHA loan. 

VA mortgage loan

If you have served in the armed forces or National Guard, you may qualify for a VA home loan—allowing you to purchase a home with a DTI ratio of up to 60%. A VA-approved lender can help you figure out if you qualify for this loan.

Pay off other debts

If making an additional payment on your student loans is not feasible, consider paying off other debt sources that are more manageable. 

Paying down your debt is the most effective way to lower your DTI ratio. For instance, clearing credit card debt in full will lead to an instant reduction in your DTI ratio. 

Credit cards also typically carry the highest interest rates so it’s best to pay those off first to save you money down the road.  

Bolster your income

Increasing your income in whatever way is manageable for you is the second best way to help pay off debt and prepare for a mortgage. Take up additional work hours or explore side hustles to inject the necessary funds. 

While most lenders require a two-year minimum at the same employer, your side hustles can still help you pay down those student debts and put you in a better position financially to apply for a mortgage. 

Student loans and mortgages can go together with the right help

Much like completing your degree, purchasing a home is one of life’s most fulfilling accomplishments. But, it’s also a major financial commitment and needs careful preparation and planning.

Exploring different mortgage options and understanding how to work around your student loan debt can help you prepare for a mortgage. 

Paying off other debts, increasing your income, and carefully considering loan products backed by Freddie Mac or Fannie Mae are all valuable financial strategies. 

Don’t let student debt hold you back from the dream of homeownership. 

Get started with Homefinity today to discover the best options for you.