On average, those who borrow money to pursue a higher education take out about $38,000 in student loans, depending on their situation. Given this, it’s not surprising that many people carry student loan debt well into their post-graduation life. But what if you still owe money on student loans when you decide to buy your first home? Thankfully, student loans and a mortgage can go together – even if student loans can make getting a mortgage a bit harder.
Can You Buy A Home If You Have Student Loans?
Home buyers with student loans can qualify for a mortgage. That’s because you don’t need to be 100% debt-free to buy a house. However, when a lender evaluates your application, they’ll look at your current debt. This includes your student loans.
How Do Student Loans Affect Mortgage Eligibility?
Before approving a mortgage, lenders must confirm you earn enough income to cover your monthly debt payments. The more debt you have, the more challenging it may be to prove you can afford your student loans and a mortgage.
A lender will determine early in the application process whether you can cover both expenses. They’ll do this by calculating your debt-to-income ratio (DTI), which measures your gross monthly income against your recurring monthly debt payments. Your total debt will include your new mortgage payment with taxes and homeowners insurance, any monthly minimum credit card payments, and any other ongoing loan payments – whether they be for student loans, auto loans, another mortgage or all of the above.
In most cases, lenders care less about the total dollar amount of your student loans than how your monthly debt payments compare to your gross monthly income. As long as you earn a reliable income and can meet DTI requirements when factoring in your current monthly debt payments and your new mortgage payment, you can likely buy a home with outstanding student loans.
How To Get A Mortgage With Student Loans: 5 Steps
Intent on buying a home even though you have student loans? You can take a few steps to improve your chances of qualifying for a mortgage.
1. Consider All Loan Types
While you may be tempted to take the first mortgage your lender offers, it’s a good idea to compare financing options.
Conventional Mortgages
Conventional conforming mortgages follow guidelines set by Fannie Mae and Freddie Mac, which standardize mortgage lending in the U.S. This type of mortgage requires a minimum credit score of 620 and a down payment worth 3% of the purchase price. You may have multiple repayment terms to choose from. You’ll likely not qualify for a conventional loan if your DTI is over 50%.
Government Loans
If you can’t qualify for a conventional loan, you may be able to buy a home with a government-backed loan. Because the federal government insures these loans, lenders are more willing to approve borrowers who wouldn’t qualify for a conventional loan because they have a lower credit score, smaller savings or higher DTI.
One government-backed loan you may consider applying for is an FHA loan, which you can qualify for with a down payment as low as 3.5% if your credit score is 580 or higher. The Federal Housing Administration insures this popular loan program and may accept a DTI of up to 57%.
If you’re an active-duty service member or veteran, or you’ve served in the National Guard or Reserves, you may qualify for a Department of Veterans Affairs (VA) loan. You may likewise qualify for a VA loan if you’re the surviving spouse of someone who’s served in the military. With a VA loan, you typically don’t need to put any money down and you can buy a home with a DTI of up to 60% in some cases.
2. Pay Down Your Debt
If your DTI is too high for a mortgage, the fastest way to lower it is by paying off debt. Doing this eliminates ongoing expenses and frees up more cash flow. Consider paying off another debt if you can’t afford to make extra payments on your student loans. For example, you’ll see an almost immediate drop in your DTI if you manage to pay off your credit card debt.
3. Increase Your Income
You can also lower your DTI by increasing your income. That might mean picking up ore hours at your job or securing a second job or side hustle. Keep in mind that the extra income will only count toward your DTI if you can prove it’s a steady source of cash. Most lenders will require at least 2 years’ worth of proof of income.
4. Apply With A Co-Borrower
Another way to drop your DTI and increase your income is by adding a co-borrower to your mortgage. When a lender assesses your finances, they’ll include your co-borrower’s income and debts. So, if someone else is on your mortgage application, make sure their DTI is better than yours and can boost your chances of approval. A co-borrower is not necessarily on the title, so be sure you know exactly what you’re signing up for.
5. Buy A Starter Home
In some cases, lenders can be flexible with eligibility requirements. If you purchase a smaller, more affordable starter home, you can make a larger down payment to keep your monthly mortgage payment within an acceptable range.
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