While getting a college education and buying a home are both parts of the American Dream, they can come with a hefty price tag. And for many of us, that most likely means taking on substantial debt.
If you hold student loans when you start thinking about buying a house, you’re in good company. Americans collectively now hold almost $1.5 trillion in student loan debt , a number that has grown steadily in recent years.
On average, 70% of undergraduates leave school with an average of around $37,000 in student loans. When interest kicks in, that amount can balloon quickly.
When you’re ready to start house shopping, you may wonder, “Do student loans affect getting a mortgage?” Could they hold you back from getting approved for a house loan or obtaining acceptable terms, or do lenders look at student loans kindly because it’s “good” debt, as opposed to something like a credit card balance?
It’s true that college graduates who have student debt are less likely to own a home than their counterparts who left school debt-free. And those with higher student loan balances are also less likely to be homeowners than peers with lower amounts of debt.
But the good news is that student debt doesn’t have to hold you back from your dreams of becoming a homeowner. Here’s what you need to know about buying a house when you have student loans.
Getting a Mortgage When You Have Student Loans
When a lender is considering offering you a mortgage, they want to feel confident that you will pay them back on time. A key factor is whether they think you can afford the payment with everything else on your plate. To assess this, a lender will consider your debt-to-income ratio, or how high your total monthly debt payments are, relative to your income.
For the debt component, the institution will look at all your liabilities, from car loans, to credit card payments, to, of course, student loans. In the case of student loans, banks know that you’re likely to be responsible for that debt forever, since it usually can’t be discharged in a bankruptcy and it’s not secured to an asset that a lender can recover. Many industry professionals say that your debt-to-income ratio should ideally be below 36%, with 43% the maximum . If you have a high student loan payment or a relatively low income, that can affect your debt-to-income ratio and your chances of qualifying for a mortgage.
For example, here’s a hypothetical situation: Let’s say you earn an annual salary of $30,000, making your gross monthly income $2,500. Let’s assume you owe $275 per month on a car loan and have a credit card balance with a $100 monthly minimum payment.
And let’s say you have student loans with a minimum payment of $550 a month. All your debt payments add up to $925 a month. So your debt-to-income ratio is $925/$2,500 = 0.37, or 37%. That’s at the limit that some conventional lenders allow. So you can see how having a high student loan payment can affect your ability to qualify for a mortgage.
Another way that student loans can affect your chances of buying a home is if you have a history of missed payments. If you don’t make your minimum student loan payments each month, that gets recorded in your credit history.
When you fail to make payments consistently, your loans can become delinquent or go into default . Skipping payments is a red flag to your potential mortgage lender: Since you haven’t met your obligations on other loans in the past, they may fear you’re at risk of failing to pay a new one as well.
Improving Your Chances of Qualifying for a Mortgage
Your student loan debt is just one part of the picture. Lenders look at many other aspects of your financial situation to assess your trustworthiness as a borrower. By focusing on improving these factors, you may be able to increase your chances of getting a mortgage.
One of the most important things to address is your credit score, since this is a key measure lenders use to evaluate how risky it would be to lend to you. Your credit score is determined by many factors, including whether you’ve missed payments on bills in the past, how much debt you have relative to your credit limits, the length of your credit history, and whether you’ve declared bankruptcy.
If your credit score is below 650 or 700, you may want to work on improving it. Starting by consistently making your minimum payments, paying off debt, or responsibly opening a new credit line may help.
If keeping up with payments has been challenging in the past, setting up automatic payments through the lender or your bank can help you stay on track without having to memorize due dates. In the case of a bankruptcy, you’ll typically have to wait 10 years for it to disappear from your record.
Another opportunity to improve your mortgage application is to strengthen your work history. Your employment matters to a lender because, if you’re at risk of losing your job, your ability to pay back the loan could change as well.
Gaps in employment, frequent job changes, or lack of work experience can all be red flags for a financial institution. If employment history is a weakness in your application, perhaps you can focus on finding a more stable role than you’ve had in the past. This could also be a matter of waiting until you’ve been in a new job for a couple of years before applying for a mortgage.
A third way to improve your prospects is to save more money for your down payment. If you have enough to put at least 20% down on a home, your student loans may become less of a factor for the lender.
You can save for a down payment by putting funds in an interest-bearing savings account or CD, asking for wedding guests to contribute to a “house fund,” earning more income, or even asking a family member for a gift or loan.
Another key area you could focus on is your debt-to-income ratio. Tackling some of your debts—whether student loans, credit card balances, or a car loan—could help lower that ratio. Another strategy is to increase your income, perhaps by asking for a raise, getting a new job, or taking on a side hustle.
Improving your debt-to-income ratio can make you more attractive to mortgage lenders because they will feel more confident that you can afford your new loan.
How Student Loan Refinancing May Help
Another way to potentially improve your debt-to-income ratio is to look into student loan refinancing. When you refinance your student loans with a private lender, you replace your existing loans—whether federal, private, or a mix of the two—with a new one that comes with fresh terms.
Refinancing can help borrowers obtain a lower interest rate than they previously had, which may translate to meaningful savings over the life of the loan. You may also be able to lower your monthly payments through refinancing, which can reduce your debt-to-income ratio.
Refinancing isn’t for everyone, since you can lose benefits associated with federal loans, such as access to deferment, forbearance, loan forgiveness, and income-based repayment plans.
But for many borrowers, especially those with a solid credit and employment history, it can be an effective way to reduce debt more quickly and improve the chances of getting a mortgage.
Don’t Let Student Loans Hold You Back
With Americans holding more student loan debt than ever before, it makes sense that this financial burden could pose a hurdle for some would-be homeowners. But student loans and mortgage applications aren’t mutually exclusive, and paying for your education doesn’t have to cost you your dream.
If you’ve been making payments on time and your debt is manageable relative to your income, your loans might not be an issue at all. If your loans do become a factor, you can take steps to get them under control, potentially improving your chances of qualifying for a mortgage.
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Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.