How to Buy a Home When You Have Student Loan Debt
January 31, 2020
Many students immediately write off buying a home because they fear their student loan debt will make them an automatic “no” for mortgage loan applications. According to the Federal Reserve, the total U.S. student loan debt is $1.6 trillion, and 2018 college grads with loans owe an average of $29,200  .
While student debt makes applying for a mortgage and affording a home more difficult, homeownership is not out of the question. Owning a home is a goal for many recent grads and those in professional or graduate programs. The process will be more difficult, and require discipline and planning, but don’t let the barriers keep you from pursuing your dreams of education and homeownership.
Here are some things to think about while preparing to apply for a mortgage while paying off student debt.
How do student loans impact your finances?
Your credit score is one of several factors that lenders look at when evaluating your financial profile for a mortgage. It is determined by how much debt you owe, what kind of debt you have, and if you pay it on time- every time.
Student loan debt can affect your credit score positively or negatively. Missing or late payments to your student debt will lower your credit score. And these kinds of credit dings will remain on your credit report for several years. Making payments on time, however, can improve your credit score. Set up monthly auto payments for your student loans to boost your credit and give you peace of mind.
Having student loan debt also affects your debt-to-income ratio (DTI). DTI is another factor that lenders consider in your mortgage application. DTI is essentially the comparison of your monthly income to owed debts. You want to keep this balanced, so that your debts don’t completely outweigh how much money you’re bringing in each month.
To calculate your DTI, add up all of your recurring monthly debts (minimum credit card payments, car loan payments, and, student debt payments) and divide it by your gross monthly income.
Should you pay off student debt before applying for a mortgage?
It doesn’t have to be one or the other. If owning a home is one of your top financial goals and you have student debt, there are ways to achieve that! As mentioned above, your DTI is a big factor in getting your mortgage application approved. So work on getting that down first.
Tips to get your DTI down
Talk to your local lender about your financial profile and what sort of DTI they’re looking for. If your DTI is still too high but you’re itching to get on that homeownership game, there are ways!
The ultimate goal is to lower your DTI, so you’re going to want to reduce the amount of overall debt you have (or increase your monthly income). Paying off more than the minimum monthly payment is a good place to start chipping away at your student debt. Also, look into grants or scholarships that can help you pay off student loans.
Get serious about budgeting. If you want to save up to make larger payments on your student loans each month, you’ll need to pull the money from other places. Stick to a stricter budget and cut back on things like streaming services, limit weekly happy hours with friends or that fancy morning latte, and check your bank statements for monthly subscriptions that you may have forgotten about. These little things add up and you could have an extra couple hundred dollars each month!
Once you make a dent in your student debt (and any other large debts you may have), and lower your overall DTI, you’ll be ready to apply for a mortgage loan. Talk to a lender early in the process to develop a plan!
A larger down payment will help
If you can put down a larger down payment, that will reduce the overall amount of your mortgage, thus lowering your monthly payments. So if you have gift money, or can save up to put down more up front, you’re looking at more affordable homeownership.
At the end of the day, a lender is going to look at your financial profile to see if you’ll be able to pay a mortgage each month. Your overall picture includes your credit score, DTI, taxes, proof of income, and assets on a basic level. Will adding a mortgage payment to your existing financial profile be manageable, or put you over the edge? These are things to think about as you make a financial plan and look at mortgage options. So up your financial wellness and talk to a lender today!
 Nerd Wallet, “2019 Student Loan Debt Statistics”, https://www.nerdwallet.com/blog/loans/student-loans/student-loan-debt/