Student loans don’t disqualify you from homeownership. While student debt affects your debt-to-income ratio, a lender will focus on your overall financial picture. The key factors for mortgage approval include your credit score, stable income, debt-to-income ratio, and down payment funds. Approval can also depend on which loan you apply for and if your student loan debt is in repayment.
If you’re preparing to buy a home with student loans, you might be closer than you think.
Over a third of first-time buyers have student loans
The good news is that student loan debt doesn’t have a greater impact on your ability to qualify for a mortgage than any other type of debt. The not-so-good news is that your monthly student loan payment can increase your DTI (debt-to-income ratio) and could make it harder to qualify.
Keep in mind that:
- Different loan types, whether it’s an FHA, conventional, VA, or even non-QM loan, have different debt requirements
- Some loan programs may be friendlier to homebuyers with student loans than others
- For example, FHA loan requirements factor in a borrower’s actual student loan payment, instead of using 1 percent of the loan balance, potentially making it easier to qualify
Sadly, many homebuyers are held back by the misconception that homeownership and student loans don’t mix. More than half of all student loan borrowers say their debt is keeping them from homeownership. Roughly 37 percent of first-time homebuyers carry student loan debt, typically amounting to $30,000.
Looking for a loan officer who gets student loans? Find a Cornerstone loan officer in your area.
Lowering your DTI with an extended repayment plan
When applying for a mortgage, a lender uses your DTI to figure out your maximum loan amount. As mentioned above, different loan programs can require different DTIs. Some programs may even exclude certain types of debt, including student loans, from a homebuyer’s DTI ratio.
Keep in mind that:
- Your DTI ratio measures your monthly debt payments against your income
- Specifically, it’s the percentage of your gross monthly income (before taxes) that goes toward payments for rent, credit cards, student loans, personal loans, or other debt
- Expenses for food, health insurance, utilities, gas, and entertainment are not included when calculating your DTI
To qualify for a mortgage, it’s not about the total dollar amount of debt. Your loan officer is more concerned with how that debt compares to your total income. Having reliable income and making regular payments bodes well for buyers with student loans.
Along with choosing the right loan program, there are several other ways to make yourself mortgage-ready as a borrower with student loans:
- Decrease your DTI wherever you can. This may look like paying off additional debt—including credit card debt and personal and car loans. An attractive DTI is considered to be below 36 percent. Loans backed by Freddie Mac and Fannie Mae may have friendlier DTI limits ranging from 45 to 50 percent.
- Work on your credit score. Each year, you’re entitled to a free credit report. Read over your credit report to see if there are any errors that can be cleared up right away. Then start using simple credit health practices, if you aren’t already, to optimize your score—like paying all bills on time, decreasing the amount of credit you’re using, and avoiding large purchases.
- Research down payment assistance. An affordable loan program geared toward first-time buyers—like an FHA, USDA, or VA loan—can reduce the upfront cost of buying. So can using down payment assistance. Ask your loan officer and search the U.S. Department of Housing and Urban Development (HUD) database to see which assistance programs may be available in your area.
- Explore increasing your income. This option may not be available to everyone, but it’s worth pointing out that a quick way to drop your DTI is by boosting your income level. This might look like requesting overtime or a promotion at your job or even starting a side hustle. In order for added income to count in terms of your DTI, however, it must be steady and reliable.
- Stay current on student loan payments. As federal student loan payments have resumed, lenders are looking more closely at student loan status. To keep your mortgage on track, it’s important to continue making student loan payments, check your loan status on StudentAid.gov, and work with your servicer on a repayment plan if you’re behind or in default.
Even if you don’t currently have to pay on your student loan debt—such as in cases of deferment or forbearance—your loan officer still must assume a payment in their debt-to-income calculation.
If your loan officer has to assume your student loan payment, this could result in an extremely high payment that can negatively affect the amount you qualify for. To avoid this, your loan officer may ask for evidence of what your payment will be when the student loan comes due. But as repayment terms vary on student loans, this can lead to confusion.
Most student loan programs offer a variety of repayment plans.
For mortgage purposes, a loan officer is only concerned with plans that repay both the principal and interest. Typically, a loan officer will advise getting on a payment schedule, like an extended repayment plan. Since an extended repayment plan takes longer to pay back, it offers a lower monthly payment. It’s important to note that extending payments over a longer period will also increase a loan’s total interest.
When your loan officer asks for evidence of your student loan payment, even though it’s not currently due, your student loan servicer should be able to provide you with an expected payment plan. Getting on the extended repayment plan could offer you the lowest monthly payment. This can lower your DTI, helping you qualify for the most mortgage.
You can still buy a home with student loans
At Cornerstone, we treat every mortgage application as individual. This means that we assess your unique situation and do whatever we can to make your dreams of homeownership possible. If you have concerns about student loans, your local Cornerstone loan officer is here to help.
Sources deemed reliable but not guaranteed. For educational purposes only. Cornerstone Home Lending does not provide debt consolidation services. Please contact a qualified professional for specific guidance.