Dreaming of homeownership? Don’t let student loans stand in your way

Bethany Ramos Finance, First-Time Homebuyer, Getting Prequalified, Home Buying

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If you’re hoping to buy a house, you may be wondering how much your student loan debt will have an impact. Do you have to pay off your loans first before getting a mortgage? Or are you able to qualify with student debt?

Let’s look at the latest data for answers. Doing this will shed light on what you can expect and which steps you can take next to make your dreams of homeownership a reality. While every person’s financial circumstances are unique, you may be closer to achieving your goal than you think.

Does student loan debt delay homeownership?

You’re not the only one who’s concerned that student loans may derail your plans of becoming a homeowner. This is actually what many first-time homebuyers believe.

As National Association of REALTORS® (NAR) data show:

“When asked specifically about purchasing a home, half of non-homeowners say student loan debt is delaying them from purchasing a home (51 percent).”

When these non-homeowners were asked why their student debt was holding up their plans, three major themes arose:
  • 47 percent said having student loan debt made it more difficult to save up for a down payment.
  • 45 percent said they believed they couldn’t qualify for a mortgage because of debt levels.
  • 43 percent said they thought this delay was expected, though they hadn’t applied for a home loan yet.

Regardless of which reason hits home with you, it’s important to note that postponing homeownership may be unnecessary.

“The easiest loan I’ve ever completed.” Prequalify now.

Is it possible to qualify for a mortgage with student loans?

The same NAR report also found that a significant number of homeowners carry student loan debt:

“Nearly one-quarter of all homebuyers, and 37 percent of first-time buyers, had student debt, with a typical amount of $30,000.”

This proves that plenty of other people in a situation similar to you are eligible to purchase a house, even while paying off student loans. You could be too, especially with steady income levels.

The Federal Housing Administration (FHA) also made changes in 2021 to how student loan debt is calculated when qualifying for an FHA loan. This change may provide the greatest benefit to borrowers carrying the most debt.

Instead of using 1 percent of your total student loan balance to calculate monthly student debt, your actual monthly student loan payment will now be factored into your debt-to-income ratio (DTI) when applying for an FHA loan. For most borrowers, this leads to a significant DTI decrease and could make it easier to qualify for a mortgage.

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. Though, loans backed by Freddie Mac and Fannie Mae may have friendlier DTI limits ranging from 45 to 50 percent.
  • Give your credit score some love. Each year, you’re entitled to a free report from AnnualCreditReport.com. 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 (called your credit utilization rate), and avoiding large purchases.
  • Research down payment assistance. An affordable loan program geared toward first-time buyers — like an FHA, USDA, or VA loan, for those who qualify — can reduce the upfront cost of buying. As can using a local down payment assistance program. Search the U.S. Department of Housing and Urban Development (HUD) database to see which assistance programs may be available in your area, with potential to lower your down payment by thousands.
  • 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.
The biggest takeaway here is that, for many hopeful homebuyers, homeownership is possible, even while carrying student debt.

The only way to know what mortgage you’re eligible for is to contact a local loan officer and prequalify. You don’t have to go this alone. Reach out to a professional who can assess your unique financial picture and give you accurate information you can use to make a decision you feel good about.

Buying a house feels easy when…

You work with a lender you can trust. Click here to download our free LoanFly app, prequalify from anywhere, and connect with a trusted, local loan officer who can tell you how much house you can afford based on your current student debt levels.

For educational purposes only. Please contact your qualified professional for specific guidance. 

Sources are deemed reliable but not guaranteed.

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