If you struggle with student loan debt, you’re not alone. The average student loan borrower has $37,172 in student loans when they graduate, an increase of $20,000 from only 13 years ago. This is a financial burden that can create delays in milestones like homeownership.
According to a 2017 National Association of Realtors report, 76% of millennials feel they can’t save for a down payment due to student debt. Furthermore, 23% of respondents were denied a mortgage in the past. The constant pressure of debt — and the additional burden of living expenses — can place you in an undeniable disadvantage when trying to qualify for a mortgage.
Can you get a mortgage with student loan debt?
Despite the grim statistics, the easy answer is yes.
Of course, student loan debt can pose a problem if you intend to purchase a home in the near future, but it isn’t an insurmountable barrier to entry. Young people are still able to realize dreams of homeownership. In fact, in the next ten years, millennials are expected to purchase at least 10 million new homes.
Despite the obstacles, you still have options if you’re intent on homeownership. With hard work and patience, you can reach your goals and achieve your aspirations. We’ll walk you through everything you need to know and more, helping to ease your transition to your new role as a homeowner.
How to qualify for a mortgage with student loan debt
There are three things you should focus on when trying to qualify for a mortgage — your credit score, debt-to-income ratio, and down payment amount. While there are other qualifications that you’ll need to meet for a mortgage, these three are ones that you have direct control over.
Your credit score is a simple number that represents the risk the lender takes in letting you borrow money. It shows lenders that you’re responsible with your money by making on-time payments on your loans, credit cards, and utilities. The higher your score, the less risk to the lender.
You should take steps to improve your credit score as a higher score will not only make it easier to qualify for a mortgage, but it’ll make you eligible for lower interest rates too. It’s best to avoid too much credit card debt — limit yourself to one or two major credit cards you make payments every month. The good news is that over time, your punctuality and smart financial choice will reflect in your credit history.
This scale illustrates the differences in credit scores and risk levels.
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: Below 580
Debt-to-income (DTI) ratio
You’ll also want to decrease your debt-to-income ratio. Your DTI ratio shows the portion of your monthly income that goes toward your debt payments like student loan payments and credit cards. It’s also one of the most critical factors in receiving approval for a loan — most lenders look for a DTI ratio of under 45%. If you want to get your DTI ratio acceptably below 45%, you have a few different options:
- Increase your income. Consider taking on a side gig or second job. Or, stretch your current income by cutting your entertainment expenses.
- Reduce your overall debt. Refinance your student loans into a lower interest and monthly payment, and transfer credit card balances to a card with a 0% interest introductory offer to pay off debt faster.
- Delay your loan application. You may decide to wait a few months before applying for a mortgage to pay down (or off) some debt or to increase your credit score.
- Provide a larger down payment. The higher your down payment, the less your total loan amount. And, the lower the amount you need to borrow, the lower your monthly payments and potentially your need for private mortgage insurance, which can stretch your income so to speak.
If you’re busy paying off student loans, it may seem impossible to save up for a large down payment. But, there are options available to help.
- Gift funds. Many loan types allow gift funds from a family member to be used towards a down payment and/or closing costs.
- Down payment assistance programs. Check with your local municipality or state government to see what’s available in your area. You’ll have to meet the qualifications for your chosen program, but you may find these requirements easier to manage than saving up.
- Low down payment loan type. There are many loan types that require little to no down payment, including FHA, USDA, VA, and Conventional 97 loans.
Should you purchase a home with student loan debt?
If you’re among the 44 million Americans who collectively hold almost $1.5 trillion in student loan debt, the responsibility of a mortgage might prove too much to handle financially.
You need to feel completely secure in your ability to pay off your debt, your mortgage, and your general living expenses.
The burden of student loan debt isn’t the only reason you might hold back, though. If you live in a state where home prices are high, like California or Hawaii, your location could cause issues. You might not have enough money saved or enough income to accommodate the asking price for houses in your area even if you have zero student loan debt.
Lastly, think about your retirement plans and other savings goals. How will a mortgage payment affect your savings, and what will you have to rearrange to accommodate the extra payments? These are critical questions that will influence your decision to purchase a home.
Keep an optimistic outlook
Even if you’re capable of buying a home with student loan debt, you have to decide whether it’s the best choice for your financial situation. A number of factors will inform your final decision, and you should consider all of them before you seek out a lender.
Set aside some time to review your credit score, debt-to-income ratio, and other relevant information. You’ll have far fewer issues in qualifying for a mortgage if you’re prepared to meet with your lender. With that in mind, allocate an afternoon to sorting out the details and managing the minutiae.
As mentioned earlier, it’s possible to qualify for a mortgage with student debt — as long as you’re properly prepared.