Does Student Loan Debt Make It Harder to Buy a House?

Are you thinking of buying a house but worried about the effect those pesky student loans will have on your purchasing power?  Student loan debt will affect a home mortgage application, but it doesn’t have to be negative. 

Student loans will affect your home application in several ways. 

Student loan debt can affect your DTI

Your Debt-to-Income Ratio (DTI) is an integral part of the consideration in the amount of credit a lender will offer you or will even help determine if you can qualify for a loan at all. 

DTI will generally include any student loans that are in repayment.  Loans on Forbearance or Deferment may not be included, but the home buyer will need to prove that the payments are on that status and will not resume for six months to a year before the lender will remove them from consideration in that ratio. 

If the loans are due to go back into repayment, the lender may ask for proof of the repayment amount when it goes back into repayment.  The home buyer can usually get this information and estimates from the company servicing their student loans.  They may also be able to get repayment estimates at studentaid.gov as well.

Then the lender will sometimes add this scheduled payment into the DTI for loan qualification.  Most lenders want to see a DTI of 40% less. 

You can figure out your DTI by adding up your minimum monthly payments on all your debt.  Then take the total and divide it by your monthly gross income.  Multiply that number by 100, and you will have your DTI.

Student loan debt will affect your credit score

Student loans primarily affect the credit score by reviewing how much of the original loan amount is compared to how much has been paid down.  This is not the same as your utilization rate that is a prominent part of your credit score.  Utilization is a rate based on revolving debt. 

Student loans and auto loans are considered in a different ratio but similar.  Your score will be higher the more the original loan is paid off.  If it is a newer loan, like you just graduated and now your student loans are in repayment, it will bring your score down for a while, potentially keeping the home buyer from getting the best rates. 

If your student loans are in default, it will drastically reduce your credit score and may keep you from qualifying for a home loan at all.  Get them out of default ASAP.  It is generally easy to get the loans rehabilitated.  Check at Studentaid.gov or with your lender for ways to rehabilitate your loans by getting on a payment plan you can afford and pay on time. 

Student loan payments will keep you from saving more for a home down payment

Any debt payment, including a student loan payment, will affect how quickly a home buyer can save a down payment. 

The one good thing about student loans is there are many repayment options.  Explore what would be the best option dependent on all your financial goals (i.e., how fast you want to pay off the loans, other debt you have, if you are trying to save a down payment for a home or something else).

You may be able to reduce your payment so you can save for a home simultaneously.  Just be sure that the interest is not too high to take away from your long-term goals.

Student loan borrowers should consider the following when buying a home

Student loans are often long-term loans, so the repayment needs to be considered long-term as a part of your financial plan and budget.  Especially when looking to make a large purchase like a home. 

It is essential to choose an affordable home price with repaying your student loans so that the buyer is not struggling to make both payments when the student loans are in repayment. 

All home buyers need to be sure that they can maintain a solid emergency fund. When you have student loans, it is even more important to consider building and keeping one while paying off your student loans. 

Student loan borrowers should be cautious with refinancing

Be careful when looking at refinancing Federal student loans.  It is common to get offers of refinancing in the mail when you have student loans.  If you refinance with a private lender, you lose all the benefits and protections of federal student loans. 

If they are already private, refinancing to a lower rate, a better payment plan, or consolidating may be suitable. 

If you are looking to purchase a home, don’t apply for or start any new loans, including a refinance within six months of the planned home purchase.  This action will negatively affect your credit score. 

If the refinance will give you a lower rate and lower payment, do this before the home purchase.  Then wait at least six months to apply for a home loan. 

Keep your student loans in good standing

It is essential to keep your student loans in good standing.  You need to pay on time every month that your loan is in repayment.  If you can’t make a payment, be sure you have put the loan on pause through your servicer.  They have several options to assist you with this. 

If you don’t know the status of your student loans or who is handling them, check at Studentaid.gov. 

If your student loans are past due or in default, make sure to get them back into good standing before applying for a mortgage.

If you need help with this, I can guide you on all things student loans!  Check out my various coaching services and choose the right one for you. 

Update: 2021 New Student Loan/Home Buying Legislation

This year the FHA or Federal Housing Administration announced changes to its student loan calculations that should make it easier for student loan holders to gain approval on a mortgage application.

The new FHA policy will allow mortgage lenders to use a borrower’s actual monthly student loan payment amount, even if it is below the traditional amount of 1% of the total balance. And if a student loan borrower’s calculated payment is $0 (which is possible under an income-driven repayment plan), the mortgage lender will automatically apply 0.5% of the outstanding student loan balance as an assumed payment, rather than 1%.