lady with red hair signing a contract reflecting concept buy a house with student loan debt

How To Buy a House With Student Loan Debt

TLDR

What You Need To Know

  • Student loan payments can affect your ability to get approved for a mortgage and save for a down payment
  • Finding ways to lower your student loan debt can make it easier to buy a home
  • If student loans are a problem, mortgage and down payment assistance programs can help

Contents

If you’re thinking about buying a home, you’ll need to do some serious research before you make any major decisions – especially if you have federal or private student loan debt.

Before you hit the panic button, we want you to know that student loan debt doesn’t have to be an obstacle to buying a home. By doing your research and carefully weighing your options, you can buy a home in a way that makes sense and won’t jeopardize your current financial situation.

You’re here – and that’s the first step! Next up, learn everything you need to know about student loans and mortgages in our MoneyTips guide.

How Student Loan Payments Can Interfere With Mortgage Approval

Student loan debt can hamper mortgage approval in a few ways:

It adds to your debt-to-income (DTI) ratio

Let’s get acquainted (or reacquainted) with debt-to-income (DTI) ratio, shall we? DTI is the portion of your gross monthly income (what you make before taxes and payroll deductions) that you use to pay off your monthly, fixed debts (think: rent, cellphone, student loans, car note, etc.). 

A healthy DTI is clutch. It’s a key factor in determining whether you qualify for a mortgage loan. In fact, it’s one of the first things your lender will check to help them determine whether you can afford the loan. 

The higher your DTI, the harder it is to qualify for a mortgage and take advantage of the best possible mortgage rates. So, if you have a lot of student loan debt, it can hurt your chances to qualify for the lowest rates. 

In an ideal world, your DTI would be 36% or less, but with student loans and other debts, that may be harder to achieve. The good news is that lenders may consider higher DTIs of up to 50%.

Debt-to-Income Calculator

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Your debt-to-income ratio…

❓   Curious what your debt-to-income (DTI) ratio is? Enter your figures and let the magic begin!

What Is DTI?

🟢   On Track – Hey money maestro! You’re right on track for your house-buying journey! Make sure you have all the information you need to make the right choice.

How much can I afford?

🟢   On Track – You’re right on track for your house-buying journey!

How much can I afford?

🚨   Above Recommended DTI – Some lenders have different requirements to qualify but it’s worth looking into your credit and finding out what you can afford within your budget.

What Is DTI?

🚨   Too Much Debt – Seems like you’ve got a little too much debt to qualify with the income you’ve put in! Do you want to try again?

It can make it hard to save for a down payment

While the amount can vary, most mortgages require a down payment. The down payment (a percentage of the home’s sale price) is money you pay at closing. 

If you’re looking at a $450,000 home, a down payment of 20% would cost you $90,000. Your mortgage loan would cover the remaining balance, which would be $360,000.  

Paying back student loans on time and in full while saving up $90,000 would be challenging for most of us. You could opt to make a lower down payment (depending on the loan), but a lower down payment could mean paying more in interest and paying mortgage insurance, which would make your future mortgage payment more expensive in the long term.

How Can I Get a Mortgage With Student Loan Debt?

There are tried-and-true strategies that can help you clear the student loan debt hurdle.

Make your payments on time and in full 

The first thing you need to do is to keep making your student loan payments – and make them on time.

Credit agencies (and lenders) notice when you’ve missed payments or paid late. That can hurt your credit score and make it harder to get qualified for a mortgage.

Try to lower your monthly payments

Look for ways to lower your payments. These strategies go beyond avoiding avocado toast, lattes and takeout. Here are some ideas to consider:

Ways To Lower Your Student Loan PaymentsPros Cons
Consolidate your student loans: Combine your federal student loans into a single loan with one monthly payment or refinance your federal and private student loans into one loan. Because consolidation usually lengthens repayment, it can lower your monthly payments. With refinancing, you may qualify for a lower interest rate, which can help you pay your loan off faster.Because consolidating usually lengthens repayment, you’ll likely pay more interest over the life of the loan. 
When you refinance federal loans, you lose the federal protections and benefits that come with those loans.
Get your job to pay for them: Thanks to new tax incentives,[2] more employers are offering federal and private student loan repayment as a job perk.Win-win, right? Your boss pays, and you don’t.According to the 2020 CARES Act,[3] you may lose out on your student loan interest deduction.
Look for a better repayment plan: If you have federal student loans, you may be able to participate in an income-driven repayment plan that adjusts your payments based on income.It lowers payments on student loans when you’re first starting out.
If you have a balance at the end of your repayment period, the forgiven amount will be taxed as income, unless you qualify for Public Service Loan Forgiveness.
Look into student loan forgiveness: If you’ve paid your loans for up to 10 years and work a public service or nonprofit job, you may be eligible for student loan forgiveness.[4]Serve others and get your loans forgiven after 5 – 10 years (or 120 monthly payments).To qualify, you must work full-time in a public service or nonprofit job, and you can’t switch to a for-profit job.[5]

Other Ways To Save Without Using Your Paycheck

Try turning your dream of owning a home into a reality with a mix of investment products, down payment assistance programs and even friends and family. 

Save for the short term: CDs and money markets

What would you do if you got a cash gift or inheritance today? If your answer is to put the money into your low- or no-interest savings or checking account (where you might be tempted to use it, BTW), we think you should consider putting the money into a money market account or a certificate of deposit (CD).

First, the interest rates are higher than standard savings and checking accounts. And second, CDs and money market accounts are designed to encourage you to leave your money alone.

Down payment assistance programs: HFA programs

There are many state- and community-run programs designed to help you with down payment assistance, offering grants, matching funds or forgivable loans. Many of these programs are run by a state’s local Housing Finance Authority (HFA). To qualify, you may have to:

  • Complete a home buyer education program
  • Meet certain income and credit criteria
  • Agree to live in a certain area
  • Work in a public service profession (like a teacher, first responder, etc.)

These programs will vary widely from state to state and community to community.

Borrow from your family

Your parent(s) may be able to give you all or some of the down payment money as a tax-free gift or a loan.

If your parent(s) can help, get a written agreement or gift letter that spells out the amount of the gift or loan, the date the money was transferred and the reason for the transaction.

If your parents can’t lend or gift you the money, but they have a good credit score and credit history, ask them if they’d be willing to become a co-signer or co-borrower on the mortgage.

Borrow from yourself

You may have assets hiding in unlikely places! See if you have any savings bonds or other investments that have been maturing. Ask your parents or check out TreasuryHunt.gov.

If you’ve been paying into a retirement plan, like a 401(k), you may be able to borrow against the plan and pay back the money over time. You’ll have a monthly payment to deal with, but it may be worth the amount you’ll save in the long run.

Use a mortgage program

Getting better with saving and lowering your monthly student loan payments can help, but it still might not be enough. If that’s the case, there may be a mortgage program that can help.

There are many home buyer programs designed to help first-time home buyers, home buyers with debt and credit issues or home buyers who aren’t able to put money down.

These programs include:

  • Federal Housing Administration (FHA) loans: These government-backed loans often allow for a debt-to-income (DTI) ratio of 43% and a credit score of 500. There is more than one type of FHA loan out there, but the most popular one is the 203(b) Mortgage Insurance Program (aka the Basic Home Mortgage loan).[6]
  • Department of Veterans Affairs (VA) loans[7]: If you’re an eligible veteran, service member or surviving spouse, you can get a loan with 0% down and no mortgage insurance. You can even qualify for a loan with a DTI of 41% and a credit score of 580.
  • Freddie Mac Home Possible®[8]mortgage and Fannie Mae HomeReady®[9]mortgage: These programs are designed to help first-time home buyers and low- to moderate-income homeowners. Some programs allow for a DTI of 45% (under certain conditions) and credit scores starting at 620.

All of these loan programs are available through many conventional mortgage lenders, like banks, credit unions and online lenders. If you qualify, you can get perks like less money required for down payments and other cost reductions, like lower interest rates.

See What You Qualify For

Once you’ve got your financial house in order, it’s time to see what you can afford. Applying for mortgage preapproval can give you a good estimate of how much mortgage you can handle.

And, by the way, here’s another reason why you’ll want to get a preapproval: Most sellers won’t even consider your offer unless you can show them a preapproval letter.

Student Loans – You Can’t Stop Me Now

According to the Brookings Institution,[10] 42 million Americans carry student loan debt. Because of this, many have had to defer, delay or deny their dreams of homeownership.

But, here’s the thing, you don’t have to be one of the 42 million. With a little planning and a little help, you can beat the odds and become a homeowner!

  1. The University of Chicago Press Journals. “Student Loans and Homeownership.” Retrieved October 2021 from https://www.journals.uchicago.edu/doi/10.1086/704609

     

  2. AICPA. “New tax incentive for employers to help with student loans.” Retrieved October 2021 from https://www.aicpa.org/resources/article/new-tax-incentive-for-employers-to-help-with-student-loans

  3. U.S. Senate. “The Cares Act.” Retrieved October 2021 from https://s3.documentcloud.org/documents/20059055/final-final-cares-act.pdf

  4. U.S. Department of Education. “U.S. Department of Education Announces Transformational Changes to the Public Service Loan Forgiveness Program, Will Put Over 550,000 Public Service Workers Closer to Loan Forgiveness.” Retrieved October 2021 from https://www.ed.gov/news/press-releases/us-department-education-announces-transformational-changes-public-service-loan-forgiveness-program-will-put-over-550000-public-service-workers-closer-loan-forgiveness

  5. Federal Student Aid. “Public Service Loan Forgiveness (PSLF).” Retrieved October 2021 from https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service

  6. Federal Deposit Insurance Corporation. “203(b) Mortgage Insurance Program.” Retrieved December 2021 from https://www.fdic.gov/consumers/community/mortgagelending/guide/part-1-docs/203b-mortgage-insurance-program.pdf

  7. U.S. Department of Veterans Affairs. “VA Guaranteed Loan.” Retrieved October 2021 from https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf

  8. Freddie Mac. “Home Possible®.” Retrieved October 2021 from https://sf.freddiemac.com/working-with-us/origination-underwriting/mortgage-products/home-possible

  9. Fannie Mae. “HomeReady Mortgage.” Retrieved October 2021 from https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/homeready-mortgage

  10. Brookings Institution. “Who owes all that student debt? And who’d benefit if it were forgiven?” Retrieved October 2021 from https://www.brookings.edu/policy2020/votervital/who-owes-all-that-student-debt-and-whod-benefit-if-it-were-forgiven/

ICYMI

In Case You Missed It

  1. Student loans can keep you from buying a home because they raise your DTI and make it hard to save up for a down payment

  2. Depending on your employer or profession, you may qualify for student loan forgiveness or assistance

  3. Getting preapproved is a smart way to figure out how much mortgage you can afford

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