Did you know that having student loans doesn't necessarily disqualify you from getting a mortgage? There are certain requirements that lenders look at, and we're here to help you understand them. We'll also share some tips that can increase your chances of getting approved for a mortgage even if you have student loan debt.

 

Is it possible to get a mortgage with student loan debt?

The answer is yes. Having student loan debt doesn't necessarily mean you won't be able to get a mortgage. Like any other type of loan, your eligibility is determined by your credit score and ability to repay the loan.

When you apply for a mortgage, one of the things that lenders will consider is your debt-to-income ratio. If you have a high amount of student loan debt, it may be harder for you to get a mortgage because your debt-to-income ratio will be higher. However, having student loans won't necessarily harm your credit score.

 

Student loans and debt-to-income ratio (DTI)

Student loans can have an impact on your ability to get a mortgage. When you apply for a mortgage, lenders use a formula called the debt-to-income (DTI) ratio to assess your likelihood of repaying the loan. This ratio is calculated by dividing the amount you pay each month towards your debts (like student loans, car loans, credit card payments) by your monthly gross income. Lenders use the resulting percentage to determine your mortgage affordability.

The general rule is that your DTI ratio shouldn't be more than 43%, but some lenders prefer a lower ratio of 36%, while others may accept up to 50%. So, if you have student loans along with other monthly debt payments, it's important to keep an eye on your DTI ratio to ensure that you can qualify for a mortgage that fits your budget.

 

Getting a mortgage with student loans

It can be challenging to get a mortgage if you have student loans. The amount of debt you have compared to your income, also known as your DTI ratio, is just one thing lenders look at when deciding if they can give you a loan. They also consider other things, like your credit score.

If you have student loans and want to increase your chances of getting a mortgage, there are some things you can do. Here are a few tips to help you out:

Change to an income-driven repayment plan

Consider changing to an income-driven repayment plan to reduce your DTI ratio and improve your chances of getting approved for a mortgage loan. It's best to make this change at least a year before applying for a loan.

Consider all types of home loans

If you have a high Debt-to-Income (DTI) ratio, you may not be eligible for a conventional mortgage loan set by Fannie Mae and Freddie Mac. However, government-backed loans offer you alternative options. FHA loans are backed by the Federal Housing Administration and can have a maximum DTI ratio of 57%. If you have served in the military, you may qualify for a VA loan, which can have a maximum DTI ratio of 60%. Make sure to meet service requirements before applying for a VA loan.

Include a co-borrower to the loan

Adding a co-borrower to your loan can help you lower your DTI ratio, which is a good thing. However, it's important to choose someone who has an excellent credit score and doesn't owe too much money. You may be able to get a loan easier this way and improve your chances of getting a better interest rate.

Expand your search

Consider looking for a smaller or less expensive house or maybe exploring other areas that are more affordable.

Pay off some debts

If you want to improve your financial situation, paying off some debts can be a great place to start. One way to do this is to focus on paying down the debt that you owe. This will help you save money in the long run because you won't have to make those monthly payments anymore. One tip is to consider paying off other types of debt first, like credit cards, before you focus on paying off your student loans. This can help lower your overall debt and make it easier to manage your finances.

Boost your income

If you're looking to lower your DTI ratio, there's another way to do it besides paying off your debts - increase your income! You can work a few extra hours at your job or start a side business to get some extra cash. Just keep in mind that lenders will want to see that this added income is consistent and reliable. They usually want to see that you've been earning this extra cash for at least two years.

 

Home loan program options for homebuyers with student loans

If you have student loans and are interested in buying a home, there are several loan programs you may qualify for. Here are some options:

 

• Fannie Mae HomeReady loan –This loan is perfect for people with lower income who want to pay a smaller down payment. It also has flexible mortgage insurance that can be canceled.
• Freddie Mac Home Possible loan – This loan is similar to the HomeReady loan. It is also great for people with lower income who want to pay a smaller down payment. The difference is that you can use your own hard work to help pay the down payment or closing costs.
• Freddie Mac HomeOne loan – This loan is specifically designed for first-time homebuyers who want to pay a smaller down payment.
• FHA loan – This loan is insured by the Federal Housing Administration. It only requires a small down payment of 3.5 percent.
• VA loan – This loan is for active-duty service members, veterans, and surviving spouses. No down payment or mortgage insurance is required.
• USDA loan – This loan is for people who live in rural areas. Visit the USDA website to see if you are eligible.

 

Should you pay off your student loans first before buying a house?

There are several factors to consider. Your debt-to-income ratio should be a primary consideration, as lenders care more about the proportion of debt to income than the dollar amount of debt. If your debt-to-income ratio is more than 50%, it is wise to focus on paying off your loans before purchasing a home. 

Additionally, it is important to look at other areas of your finances, such as having an emergency fund and making retirement contributions, before investing in a home. Furthermore, consider the interest rate on your student loans, as higher interest rates will cost more in the long run. Finally, take a look at your repayment plan to ensure that you are paying off enough of your debt each month. If all these factors look good, now might be a good time to buy a home.

 

The Bottom Line

Having student loans doesn't necessarily disqualify you from getting a mortgage. However, your eligibility will depend on your credit score and ability to pay back the loan. It's important to keep an eye on your debt-to-income ratio to ensure you qualify for a mortgage that fits your budget. If you have student loans and want to increase your chances of getting a mortgage, there are some tips you can follow, such as changing to an income-driven repayment plan, considering all types of home loans, including a co-borrower, expanding your search, paying off some debts, and boosting your income.