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Buying a House With Student Loan Debt

Student loan debt can affect your ability to get a mortgage and buy a home by increasing your debt-to-income ratio and reducing the amount you can save for a down payment. This guide will help you avoid these issues.

Student loan debt is rising at a troubling rate. In fact, according to LendEDU’s average student loan debt statistics, there is $1.52 trillion in outstanding student loan debt in the United States. Homeownership rates, on the other hand, are falling — particularly among millennials.

  • Other Factors That Affect Your Ability to Buy a House
  • Student Loans and Mortgages: Tips to Improve Your Chances

Getting a Mortgage with Student Loans

Qualifying for a mortgage with student loans can sometimes be more difficult, but it is definitely possible. In fact, student loans aren’t a particular cause of concern for most lenders and won’t, by themselves, disqualify you from getting approved for a mortgage.

Front-End Ratio

The front-end ratio compares your housing costs to your income. This includes your principal and interest payments on your mortgage, as well as property taxes and insurance. The total aggregate cost of housing is abbreviated as PITI, and lenders usually want it to be below 28% of your income.

Back-End Ratio

Your back-end ratio could be affected by your student loans. This ratio compares your income with your total obligations, including PITI plus other monthly debt payments.

Other Factors That Affect Your Ability to Buy a House

There are also some other factors that can affect whether you are able to buy a house. Some relate directly to your student loans or debt-to-income ratio but others are independent.

Your Credit Score

Your credit score is a key factor in whether you can get a loan. Most mortgage lenders want a score of at least 620 for a conventional loan, although you can get a home with a score as low as 500 if you obtain an FHA loan. However, the better your score, the better your interest rates.

  • Your credit utilization ratio: This second-most important factor considers the credit available to you divided by credit you’ve used.
  • Credit mix: It’s helpful to have a variety of different kinds of debt to get the highest credit score. This includes revolving debt (such as credit cards) and installment loans (such as personal or car loans).
  • The length of your credit history: This is determined by the average age of your accounts, and a longer history will result in a better score than a shorter history.
  • Inquiries: This looks at new credit. Each time you apply for new credit, an inquiry goes on your report and stays on your report for two years. Your score is lowered by too many inquiries.

Your Income and Employment History

This is related closely to your debt-to-income ratio. The higher your income, the more confident lenders are that you’ll be able to pay off your mortgage — even if you have other debts, such as student loans.

Your Down Payment

The more money you are willing to put down on your home, the easier it should be to qualify for a mortgage and the better the mortgage rates you’ll receive.

Student Loans and Mortgages: Tips to Improve Your Chances

If you want to improve your chances of getting a mortgage while still owing money on student loans, the most important things you can do are improve your credit score, pay off your student loans, and increase the amount of your down payment.

Pick Up a Side Hustle

Taking on a side gig can result in a higher monthly income, which has a positive impact on your debt-to-income ratio. It can also help you save for a larger down payment or pay off more of your debt prior to applying.

Refinance Your Student Loans

Refinancing your student loans can also be helpful if you have improved your credit score, paid down debt, or increased your income since you originally borrowed.

Get Pre-Approved Before Applying

Many mortgage lenders allow you to see if you can qualify for a loan and find out potential loan terms prior to actually applying for a mortgage. It is a good idea to do this so you can try to find a lender with whom you’ll qualify without having lenders do hard credit checks that could hurt your score.

Look for Down Payment Assistance Programs

Down payment assistance may be available through government organizations, community organizations, or non-profits. Assistance is more likely for first-time home buyers and lower-income buyers.

Consider a Smaller Home

Buying less than you can afford — rather than overextending yourself to purchase an expensive home — can help set you up for financial success in many ways. But most of all, it will reduce the total cost of your mortgage, property tax, and maintenance costs.

With the help of LendEDU’s blog, tools, and resources, our goal is to assist you in making educated financial decisions. LendEDU: Educated Financial Decisions.