For millions of people, owning a home is a quintessential part of the American dream. But with so many young adults having outstanding student loans, the dream of homeownership can seem like an unrealistic fantasy. According to a 2021 survey released by the National Association of Realtors, 29% of student loan borrowers said their debt delayed them from buying a home.
However, it is possible to buy a home even if you have outstanding student loan debt; it just might take a little extra work.
It’s a personal choice whether to buy a house when you have student loan debt, just like any other financial choice. If you aren’t sure whether it’s a good idea, carefully consider the pros and cons and your finances to make an informed decision.
Many people wonder if they can buy a house when they have existing student loan debt. This is an excellent question that deserves a thorough answer. As a first-time homebuyer with student loans, you may feel conflicted about taking on mortgage debt on top of your current obligations. However, you can absolutely purchase a home while paying off your student loans. Let’s discuss how lenders view student loan debt, steps to improve your chances of approval, and when it makes sense to pay off loans before buying.
How Student Loans Affect Mortgage Eligibility
Lenders look at your debt-to-income ratio (DTI) the most. DTI compares your monthly debt payments to your monthly gross income. Lenders find your DTI by adding up all of your recurring debts and dividing that number by your monthly gross income.
When giving out conventional loans, most lenders want to see a DTI of 6% or less. Government-backed loans may allow ratios up to 50% or higher. The lower your DTI, the better your chances of approval.
Your student loan payment gets included in your DTI calculation. Lenders care more about how much you pay each month than how much you owe on your student loans. Lenders will include an estimated monthly payment for your loan debt in your DTI even if you have put it on hold.
The bottom line is you can qualify for a mortgage with student loans as long as you have enough steady income to support both debts. Your DTI gives lenders confidence you can make both payments responsibly.
Tips for Getting a Mortgage With Student Loans
If your DTI is too high you can take steps to improve your mortgage eligibility
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Compare all loan types: conventional, FHA, VA, and USDA loans Government-backed options allow higher DTIs.
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Pay down debts – Paying off debts like credit cards can lower your DTI quickly. Make extra student loan payments if possible.
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Increase income – Boost your DTI by taking on a side job or asking your co-borrower to join your application.
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Buy a starter home – Opt for a more affordable home that keeps your mortgage payment manageable.
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Improve credit – Maintain on-time payments and dispute errors to boost your credit scores. Lenders offer better rates and terms to borrowers with higher scores.
Taking these steps demonstrates financial responsibility and shows lenders you can manage mortgage debt.
Should You Pay Off Student Loans Before Buying?
This important question deserves careful thought before buying a home. Consider the following factors:
Calculate Your DTI First
Add up your monthly debts like car loans, credit cards, and student loan payments. Divide by your gross monthly income to find your DTI percentage.
- DTI below 36% – Your finances may support homebuying if you have savings
- DTI 36% to 50% – A government-backed loan could work, but save more first
- DTI above 50% – Focus on paying down debts before taking on a mortgage
Evaluate Your Current Savings
Beyond your DTI, lenders want to see adequate savings for:
- Down payment – At least 3% for conventional loans, up to 20% to avoid PMI
- Closing costs – Usually 2-5% of the purchase price
- Emergency fund – 3-6 months of living expenses
If your savings are light, pause homebuying to bulk up your accounts.
Compare Loan Terms to Payment Progress
Do your student loans have high interest rates? Are your payments mostly covering interest? In these cases, it may make sense to pay down more before buying.
Crunch the numbers to see if an extra 6-12 months of aggressive payments can knock down your balance substantially. This can save on long-term interest and strengthen your application.
Key Takeaways
While student loans can make getting a mortgage trickier, homeownership is absolutely possible:
- Lenders mainly consider your DTI ratio, not just loan totals
- Take steps like lowering debts or increasing income to improve eligibility
- Make sure your finances align with savings goals beyond your DTI
- Paying off loans first helps, but may delay homebuying goals
Stay focused on showing lenders you can manage debts responsibly. This demonstrates you’re ready for a mortgage. With some preparation, you can achieve your dream of owning a home, even with student loans.
Slows Down Student Loan Repayment
If you are saving for a down payment or purchasing a house and then have to pay for maintenance and upkeep, you may be using extra funds that could have been put toward your student debt. This could make it take longer for you to pay off your student loans and cost you more in interest over time.
It Could Deplete Your Savings or Emergency Fund
Buying a home requires a substantial upfront investment. You’ll need to cover the down payment and closing costs, and the house may need repairs. Home repairs are never cheap, and you may be surprised by just how much they can cost. For example:
Those expenses can wipe out your savings and quickly deplete your emergency fund. And if anything else goes wrong — a flat tire, a medical bill, a veterinary emergency — you could be left scrambling to cover the cost or end up taking on more debt.
Buying A House When You Have Student Loan Debt *What You NEED To Get Approved*
FAQ
Does having student loans affect buying a house?
It’s important to keep in mind that student loans usually don’t have a bigger impact on your chances of getting a mortgage than other types of debt like credit card debt and auto loans.
Can you be denied a mortgage because of student loans?
When you apply for a mortgage, lenders look at your student loan debt. If your debt-to-income (DTI) ratio is too high, they may not give you the loan. If you are behind on your student loan payments, it can hurt your credit score, which can make it harder for you to buy a home.
What is the 7 year rule for student loans?
How much student loan debt is too much for a house?
Student Loan Debt-to-Income
A 43% DTI is the upper limit to qualify for a mortgage with most lenders; this figure includes the prospective mortgage payment. The U.S. Consumer Finance Protection Bureau recommends a 36% DTI to qualify for competitive mortgage rates.