It ain’t easy to juggle student loan debt with the dream of buying a house.
Education is important for personal growth and development – and your financial future. So, don’t let your student loan debt get in the way of your home buying dreams.
Student loan debt can become a big problem when you’re getting ready to buy a home, but there are ways to make it more likely to get approved for a mortgage – DON’T lose hope!
Why Student Loan Payments Make Mortgage Approval Harder
As a future homeowner, student loan debt can interfere with your ability to get approved for a mortgage in a couple of ways.
First, it adds to your debt-to-income (DTI) ratio, making you less likely to qualify for the lowest rates. The higher your DTI, the harder it is to qualify for a mortgage and take advantage of the best possible mortgage 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%.
❓ 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?
Second, student loan debt makes it harder to save for a down payment, which you’ll have to pay toward your mortgage. The less down payment you have, the more interest and possible insurance you’ll pay in the long run.
This can make your future mortgage payments more expensive. That’s a lot to think about when you’re starting out.
How You Can Buy a House With Student Loan Debt: The Facts
So how can you buy a house with student loan debt?
Make your payments
The first thing to do is to keep making your student loan payments – and make them on time.
Credit agencies notice when you skip payments or pay late. That can hurt your credit score and make it harder to get qualified for a mortgage.
Try to lower your payments
The next thing to do is look for ways to lower your payments.
Some of the ways you can do this include:
|Ways To Lower Your Student Loan Payments||Pros/Cons|
|Refinance your student loans: Consolidate your federal and direct student loans into a single monthly payment.||Pros: You may be able to get a lower interest rate.|
Cons: You may lose access to federal student loan benefits and programs like income-driven repayment plans.
|Get your job to pay for them: Thanks to new tax credits, more employers are offering help with student loan repayment as a job perk.||Pros: Win-win, right? Your boss pays, and you don’t.|
Cons: According to the 2020 CARES Act, you may lose out on your student loan interest deduction.
|Look for a better repayment plan: You may be able to participate in an income-driven repayment plan that adjusts your payments based on income.||Pros: It lowers payments on student loans when you’re first starting out.|
Cons: Paying the balance is only delayed. You’ll still be responsible for paying the balance later, and there may be more interest.
|Look into student loan forgiveness: You may be eligible for student loan forgiveness if you pay your loans for 5 – 10 years and work consistently in a public service or nonprofit job.||Pros: Serve others and get your loans forgiven after 5 – 10 years.|
Cons: To qualify, you need to work consistently in lower-paying careers for eligible employers only, and you can’t switch to a for-profit opportunity.
Other Ways You Can Save For a House Without Tapping Your Paycheck
Student loans can make it harder to qualify for a house without going broke.
But there are ways to boost your ability to put money down and get the house of your dreams.
Save for the short-term: CDs and money markets
Let’s say you get a cash gift or an inheritance. Instead of putting the money into your regular savings or checking account (where you might be tempted to use it), consider putting the money into a money market account or a certificate of deposit (CD).
The interest rates are higher than standard accounts, and CDs/money market accounts are designed to encourage you to leave your money alone for a set period.
Down payment assistance programs: HFA programs
There are many state- and community-run programs designed to help you with down payment assistance in the form of grants, matching funds or forgivable loans. Many of these programs are run by a state Housing Finance Authority, which is different from the Federal FHA. To qualify, you may need to:
- Complete a home buyer education program
- Meet certain income and credit criteria
- Agree to live in a certain area
- Be a teacher, first responder or work in other public service professions
These programs will vary widely from state to state and community to community.
Borrow from your family
Asking your parents for help can be hard, but many first-time home purchases are made with help from a parent. Parents may be able to give you all or some of the money as a gift or offer it as a loan.
If your parents can help, make sure you have 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 give you the money, ask them if they’d be willing to become a co-signer or co-borrower on the loan.
Borrow from yourself
You may have assets in unlikely places.
Check and see if you have any savings bonds or other investments that have been maturing. You may need to ask your parents, or you can check at 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
Saving and lowering your payments can help, but if your student loans are still making it hard to buy a home, 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 can’t put money down.
- Federal Housing Administration loans (FHA loans): These government-backed loans often allow for a debt-to-income ratio (DTI) of 43% and a credit score of 500.
- Department of Veterans Affairs loans (VA loans): If you’re an eligible veteran/military member/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.
- Fannie Mae and Freddie Mac loans: These programs are designed to help first-time homeowners 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 and online lenders. If you qualify, you can get perks like lower interest rates, less money required for down payments and other cost reductions.
See What You Qualify For
Once you’ve got your financial house in order, it’s time to see what you can really afford. Applying for mortgage preapproval through a bank or online lender can give you an idea of how much mortgage you can handle.
Hat tip to tech for making the process easy and convenient! And take note: 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, 42 million Americans have student loan debt, and because of it, many have had to defer their dreams of homeownership.
But 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!