Most students don’t realize how student loan debt can impact home buying when they are trying to get an education. In fact, more students today look back and wish they didn’t take out loans than the other way around.
A big reason for this is the fact that student loans can make it nearly impossible to buy a home. Qualifying for a mortgage with massive student loan payments can be difficult and not everybody went to school to become a doctor.
For those in the medical field, loans for Degreed Professionals is the answer. Some of the other fields requiring huge student loan debt for school also qualify for these types of programs, but those with just a four-year college degree and most going through a graduate program will struggle to get a mortgage without paying off some of their student loan debt.
The Debt-To-Income Ratio
The major reason you won’t qualify for a mortgage with student loan debt is the Debt-To-Income ratio (DTI). Lenders look at both the front-end ratio and the back-end ratio.
The front-end ratio is the housing portion and you can figure out your front-end DTI ratio simply by dividing your projected monthly mortgage payments by your gross monthly income.
Most lenders will be looking for a front-end ratio of about 28%. Some FHA loans will allow for a front-end ratio of up to 31%.
The back-end ratio takes more into consideration than just the mortgage payment and your monthly gross income. This portion will include all your debt obligations, such as car payments, student loans, credit card payments, and any other loan payments showing up on your credit report. Often, this ratio won’t include medical bills.
You can figure out your back-end DTI ratio by adding up all your monthly debt payments and dividing it by your gross monthly income. This ratio doesn’t factor in utility bills or anything not showing up on your credit report.
Most conventional lenders want to see a back-end ratio of 35% or less. Some FHA loan programs will allow this ratio to go as high as 43%.
How Student Loans Factor Into Home Buying
The problem student loan debt provides comes into play with the debt-to-income ratios we discussed above. When you owe student loans and you have 5 or 10 loans all with monthly payments, they tend to throw your DTI out of whack, even if you can afford them, along with your current rent.
For example, if you make $4,000 per month as your gross income and you have student loan payments adding up to $1,000, you’re already in a losing situation. Add in a $1,000 mortgage payment and you’ll struggle to find a lender willing to approve you, even if you have no other debts.
Ways to Get Approved for a Mortgage with Student Loan Debt
There are ways to buy a house, even with huge student loans. As mentioned earlier in this post, if you went to school for medical, law, or another career requiring massive student loans, you may be able to use a degreed professional program.
This type of program doesn’t factor in student loans and actually bases the mortgage on a letter of employment and your future earnings. It can be very beneficial for those with massive student loans because of medical school or law school.
Even if this doesn’t describe you, there are ways to make your situation more appealing to lenders. Let’s look at a few of the things you can do.
Put More Money Down
It is often a misconception that home loans require a 20% downpayment. While it is not necessary, a larger down payment will help lower the future mortgage payments. However, if you do put 20% or more of the sale price down then that could eliminate the private mortgage insurance (PMI) and lower your DTI to help you get approved.
Refinance your Student Loans
If you have multiple student loans, all with monthly payments, it can be beneficial to refinance your loans or consolidate them into one monthly payment. By doing this, you may be able to lower your monthly payment quite a bit, which will help lower your overall DTI.
Pay Off Small Debts First
Before buying a home, you can make your DTI more appealing by paying off smaller debts. Sometimes, you end up with student loans under $1,000 and others well over $5,000. By Paying off the smaller loans, you can eliminate the monthly payment from your DTI.
This can also work if you have small debts that are not student loans. Pay them off and you’ll be in better shape with your DTI, overall.
Choose a Less Expensive Home
Maybe you’re shopping for a home outside of your price range and the large mortgage payment, along with student loan payments just doesn’t work. Shopping for a smaller, less expensive Mid Atlantic home might be the way to go.
When you lower the mortgage payment, you’ll also lower your overall DTI, making you more appealing for lenders. Start with an actual starter home or even a fixer-upper for a lower cost and you might be able to buy a house in the Mid Atlantic area, even with large student loan payments.
Increase Your Income
While it may not be the easiest solution, increasing your income will also help with your DTI. If you work in a job where you can get a raise or you have any control over your income, this can help. Of course, you can also start a side hustle or take on a part-time job to help you earn extra income.
Even if you don’t use the part-time income on your mortgage application (you’d likely have to keep the job for a couple of years for it to count) you can use that extra money to pay off smaller debts.
Look Into First-Time Home Buyers Programs
Many of the First-Time Home Buyer Programs will work with buyers with student loan debt. They are less strict compared to conventional lenders and it might be easier to get approved. You may not need as low of a DTI and you may even get some assistance with the down payment or other aspects of the home buying process.
Improve Your Credit Score
A higher credit score will help with getting approved for a mortgage. While the DTI ratio is a very important factor, so is your credit score. A higher credit score may allow the lender to be lenient on the DTI.
Don’t Delay, Start the Buying Process Today
While many college-educated Americans have delayed the home buying process due to student loans, you don’t have to. A Student Loan Hero survey showed 43% delayed the process because of student loan debt. There are ways to get approved, even if your student loans are causing you issues.
If you’re considering buying a home and you think your student loan debts will keep you from making the purchase, talk to a skilled real estate agent. They may be able to recommend the right lender and first-time home buying programs for you.