Can you buy a house with student loan debt?
There are ways to get a mortgage with student loan debt, even if you’re saddled with a hefty monthly student loan payment.
Here’s how student loan debt can affect your mortgage eligibility and some tips to make the home buying process go as smoothly as possible.
How lenders view student loan debt
Bogged down by student loans? You’re far from alone.
One in four Americans with a bachelor’s degree or higher has student debt, the Census Bureau reports. Collectively, borrowers in America owed $1.58 trillion in federal student loans at the end of 2021, according to the New York Federal Reserve.
Student loan debt can affect your ability to qualify for a mortgage loan. Why? Because student debt impacts your debt-to-income ratio, or DTI.
Student loans & your debt-to-income ratio
DTI is your total monthly debt payments — such as student loan payments, car payments, credit card payments, etc. — divided by your gross monthly income. Mortgage lenders consider your DTI ratio when assessing your ability to repay a home loan.
Let’s say you’re earning $5,000 a month and paying $600 toward debts each month. Divide $600 by $5,000 and your DTI ratio is 0.12, or 12%. But, if you add a $1,000 monthly mortgage payment to the mix, your DTI jumps to 32%.
Lenders like to see loan applicants with low DTI ratios, since these borrowers are historically less likely to default on their mortgage payments. Most lenders will only offer loans to borrowers with DTIs of up to 36%.
The bad news: An estimated 16% of undergraduate student loan borrowers will have a DTI of over 20% at graduation just from student loans, a recent LendEDU study found. That may explain why more than one in four student debt holders say their debt has impacted their decision or ability to purchase a home, a 2021 survey by the National Association of Realtors showed.
Fortunately, there are steps you can take to lower your DTI ratio and make homeownership a reality, even with student loan debt.
Step-by-step guide to buying a house with student loans
1. Pay down some debts
Reducing your overall debt load can strengthen your mortgage application. So, if you’re carrying a significant amount of debt on credit cards or an auto loan, paying off a large chunk of it can help lower your DTI ratio and make you a more attractive mortgage borrower.
2. Raise your credit score
Credit score is another component of your financial situation that lenders consider when evaluating loan applications. Therefore, make sure your credit history is in tip-top shape before applying for a mortgage.
This is especially important since a higher credit score typically translates into a lower interest rate, which in turn often means a lower monthly payment on your new home.
In 2020, the average credit score for consumers with a student loan was 689, while the average credit score among all consumers was 710, credit bureau Experian reports.
FICO is the most popular credit scoring model used in the U.S. for lending decisions. Scores range from 300-850. The scoring range denotes ratings: Poor, Fair, Good, Very Good, and Exceptional. Most mortgage lenders look favorably at borrowers with Good, Very Good, or Exceptional credit ratings.
Conventional mortgages typically require a minimum credit score of 620. Only borrowers with excellent credit — often mid-700s or higher — can qualify for the best interest rates.
One way to improve your credit score is to get a credit line increase. This will lower your credit utilization ratio, which accounts for 30% of your FICO score.
Also, check your credit reports for errors that may be dragging down your score. You can get your credit reports for free at AnnualCreditReport.com.
3. Look into down payment assistance programs
The bigger your down payment, the less money you have to borrow to purchase a home. And a smaller loan amount equates to a lower monthly payment — which will help if your DTI is already high because of student loan debt.
Most conventional home loans require a down payment of at least 5% of a home’s sales price. But if you’re having trouble putting a down payment together, you may qualify for down payment assistance.
There are more than 2,000 down payment assistance programs that offer qualified home buyers grants, loans and/or tax credits. You can search for programs and view eligibility requirements at Down Payment Resource.
4. Consider finding a co-signer
A co-signer is a person who is legally responsible to cover your mortgage if you fall behind on your loan payments. Enlisting a co-signer, such as a parent, may make you more qualified for a mortgage, since your co-signer’s income, credit score and assets will be taken into account by lenders. Including a co-signers income on your application might mean you can qualify even with a high DTI due to student loan debt.
Best loan types for borrowers with student loan debt
Although conventional loans typically require a minimum down payment of 5%, there are other types of loan programs to consider if you have student loan debt and are struggling to assemble a down payment.
Established during the Great Depression, Federal Housing Administration (FHA) loans enable you to qualify for a mortgage with a down payment as low as 3.5%. You can also get approved with a lower credit score (think low to mid 600s). Finally, FHA loans often allow a higher debt-to-income ratio than conventional mortgages, which can make all the difference to borrowers with student loan debt.
The caveat: FHA borrowers must pay a mortgage insurance premium (MIP) of 1.75% upfront, plus an ongoing monthly fee of 0.85% for a mortgage of 15 years or longer.
U.S. Department of Agriculture and Rural Development (USDA) loans are often offered in areas with populations of 10,000 or fewer residents. (You can see if your town is eligible at USDA.gov.) USDA loans have no official credit score minimum requirement, allow for DTI ratios of up to 41%, and borrowers can put as little as 0% down. There are a couple of drawbacks, though — USDA loans charge an upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35% of the loan amount.
If you’re a recent medical school graduate, a physician loan (or “doctor loan”) may be a good option. Physician loans allow for down payments as low as 0% (though loans above $750,000 require a low down payment). They typically require a credit score of 680 or higher. And they might have special allowances to help borrowers who incurred a large amount of student loan debt in medical school.
Buying a house with student loans FAQ
Will student loans affect buying a house?
Your student loan debt could impact your ability to qualify for a mortgage. If your debt-to-income (DTI) ratio — your total monthly debt payments, such as student loan payments, car loan payments and credit card payments, divided by your gross monthly income — is above 43%, you may have trouble qualifying for a home loan.
Should you pay off student loans before buying a house?
You don’t need to pay off your student loans to qualify for a mortgage. Still, keeping up with your student loan payments is crucial; if you miss a monthly payment, your credit score could take a big hit, which in turn could hurt your eligibility for a home loan.
Do mortgage lenders look at student loans?
Absolutely. Lenders look at a variety of types of debt — such as student loans, auto loans, personal loans, alimony and credit card debt — when reviewing loan applications and sizing up potential borrowers.
Can you get a mortgage if you have student loans in deferment?
Deferment probably won’t negatively affect your ability to get a mortgage but mortgage lenders will still include your loans when determining your debt-to-income ratio. The same is true if your student loans are in forbearance, or if you have an income-based repayment plan.
Can student loans be refinanced into a mortgage?
For borrowers with student loan debt that carries a high-interest rate, it may be possible to refinance that debt into a mortgage using a cash-out refinance. But this will change your loan term and could likely increase the interest you’ll pay in total over the life of the loan.
Can you qualify for a mortgage if you have student loan debt?
Yes, you can still get approved for a home loan even if you have student loan debt. Proof: In 2020 nearly a quarter of all home buyers, and 37% of first-time buyers, had student debt, with a typical outstanding student loan balance of $30,000, a National Association of Realtors survey found.
Whether you qualify for a loan will ultimately depend on your credit score, income, debts and down payment amount. But don’t let student loans alone deter you from starting the home buying process.