July 1, 2022 by Leave a comment

Buying a house with student loans can be a challenge, but it doesn’t mean it’s impossible. Having student loan debt increases your debt-to-income (DTI) ratio and can hurt your credit score, which lenders classify as being at a greater risk of loan default. 

However, there are steps you can take to improve your financial health and your ability to qualify for a mortgage.

If you’re thinking of buying a house with student loans, then here’s how it can affect your ability to get a mortgage and ways to minimize its impact.

Buying a House With Student Loans

You don’t need to have zero debt before applying for a mortgage, but mortgage lenders will look at your overall debt when determining your eligibility for a loan. If you have outstanding student loan debt, then it may be more challenging to buy a house.

Here’s how buying a house with student loans can affect your ability to qualify for a mortgage:

  1. Student loans increase your debt-to-income ratio: Your debt-to-income ratio is the percentage of your gross monthly income that goes towards minimum debt payments. The higher your DTI, the more income you have going toward debt. If you have a large amount of student debt, then it could significantly impact your DTI ratio.
  2. Student loans hurt your ability to save for a down payment: Most conventional mortgages require you to pay a percentage of the home’s purchase price, known as a down payment. The typical down payment ranges from six to seven percent for first-time homebuyers, which means saving between $18,000 and $21,000 on a home worth $300,000. Considering the average student loan payment is $460, saving for a down payment could be difficult.
  3. Your student loan payment history affects your credit score: Your payment history is the most important factor in determining your credit score, accounting for 35% of your FICO score. If you’ve consistently made timely payments, then that will increase your credit score. If you’ve missed even one recent student loan payment, then your score will drop.

Should I Pay Off Student Loans?

It takes 20 years for the average student borrower to pay off their student loan, with some professional graduates taking 45 years to repay their student loan. So waiting to buy a house until after you’ve repaid your student loans could take a while. 

However, whether or not you should pay loans first or save for a down payment on a house depends on your financial situation. 

Here are some reasons to save for a down payment first:

  • You can make a down payment on a house as low as 3% for conventional mortgages
  • You can afford a mortgage, your student loan bill, and any other expense that comes with homeownership
  • Housing prices, the cost to rent and interest rates keep rising
  • Student loan debt is not as bad as other types of debt due to longer repayment terms and lower interest rates
  • Owning a home can be less expensive than renting

Some reasons to pay off your student loans first:

  • Your credit score is under 620
  • You have a DTI above 43%
  • You struggle to save money every month and you don’t have any flexibility in your budget
  • Your student loan has a variable interest rate, which means it could go up over time
  • The longer you wait to pay off your student loan, the more interest you pay

Interested in applying for a home loan? Find a Total Mortgage branch near you and speak to one of our mortgage advisors to explore your borrowing options.

Can I Buy a House With Student Loan Debt?

If you have student loan debt, you may be wondering whether it can affect your ability to get an affordable mortgage. Existing debt can affect your interest rate, and whether or not you can qualify for a loan at all, but it doesn’t mean you should forget about your dream of homeownership.

There are steps you can take to improve your chances of qualifying for a mortgage or getting a better interest rate.

Improve Your Credit Score

Before applying for a mortgage, make sure to check your credit report for any errors and to see if your score qualifies for a mortgage. Unless you’ve missed a payment, then student loan debt shouldn’t have a big impact on your credit score.

To help boost your credit score, make sure to pay all of your bills on time and not close any older credit card accounts. The older the average age of your credit accounts, the better your credit score. Closing any lines of credit can also increase your credit utilization and cause your credit score to dip.

Reduce Your DTI

Lenders generally want to see a DTI ratio under 43%. If your DTI is too high, you can lower it by decreasing your monthly debt and increasing your income.

Try to pay off accounts with the lowest balance to lower your debt. You can also boost your monthly income by asking for a raise at work or picking up a part-time job. 

Lower Your Student Loan Payments

There are several options to reduce your monthly student loan payment, and ultimately your DTI ratio. Consider an income-driven repayment plan if you have a federal student loan or refinance your student loan with a private lender for a better interest rate.

Explore Other Options

Depending on where you live, you may also qualify for down payment assistance programs. You can also check out other mortgage options, such as an FHA, USDA, or VA loan. FHA loans allow buyers to make a down payment as low as 3.5% while USDA and VA loans have no down payment requirement.

Ready to Purchase a Home? Consider Total Mortgage

Buying a house with student loans is possible, but it could mean you’ll need to take extra steps to ensure you’re capable of qualifying for a mortgage.

If you’re ready to take the next step, consider Total Mortgage’s loan program options. Have questions? Schedule a time to chat with one of our mortgage experts.

Apply online today and get a free rate quote.


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