Do Student Loans Affect Buying a House?

If you have student debt and want to buy a home, you may wonder whether to first pay off student loans or buy a house. If you wait until your student loans are paid off to buy a home, you might be renting for a very long time. If, on the other hand, you buy a house before you pay off your student loans, you may be stretching your finances too thin. Which goal should you focus on first?

There’s no one right answer for everyone when it comes to buying a house with student loan debt. Whether you should pay off your student loans or buy a house first will depend on your priorities, time frame, and financial situation. Ideally, you want to work towards both goals at the same time, making progress on your debt while also saving up for a down payment on a home.

Here are some things to consider when deciding whether it’s better to pay off student loans or buy a house.

How Do Student Loans Affect Buying a House?

Student loan debt can affect buying a house by impacting some key financial factors.

Debt-to-Income (DTI) Ratio

Your debt-to-income (DTI) ratio shows how much of your monthly income goes toward debt repayment each month. The ratio is expressed as a percentage, and mortgage lenders use it to determine how well you manage monthly debts — and whether you can afford to repay a loan.

A lower DTI is better. Carrying a lot of student loan debt might mean that more of your monthly income goes toward debt, which could make your DTI higher.

Credit Score and Credit History

How you repay your student loans may impact your credit. Making student loan payments on time consistently may help strengthen credit. Lenders typically see it as a favorable sign that an individual is a responsible borrower.

Conversely, being late with student loan payments, or failing to make payments, can negatively impact credit. Missed student loan payments can be reported to the credit bureaus once they are 90 days late, and they can stay on credit reports for seven years, which may make it difficult to qualify for a mortgage.

Down Payment Savings

If you have substantial student loan debt that you’re struggling to repay, it may be challenging to save enough for the down payment on a house as well. Even if you can scrape together the funds, juggling a mortgage and student loan debt might stretch your budget to the limit.

Reasons to Pay off Your Student Loans Before Buying a House

Depending on your financial situation, it may make sense to pay off your student loans before you buy a house. Here’s a look at some reasons why you might want to prioritize student loan repayment over saving for a down payment.

The Longer You Wait to Pay off Student Debt, the More Interest You’ll Pay

If you want to save money on interest, it may be a good idea to prioritize student loan repayment over buying a home. By paying more than the minimum payment due each month, you can reduce the principal balance. This, in turn, will typically shorten the duration of the loan period — and the interest accrued. Just make sure that your lender puts any extra payments you make towards your principal (and not future payments).

Another potential way to speed up repayment is to refinance student loans. Refinancing might help a qualifying borrower obtain a lower interest rate, a shorter repayment period, or both. Private and federal student loans can be refinanced. Just keep in mind that refinancing federal student loans with a private lender, makes them ineligible for federal benefits, such as deferment, forbearance, and forgiveness programs.

Your Debt-to-Income Ratio Is High

To calculate your current DTI, simply add up all of your monthly debt payments, then divide that number by your monthly gross income (before taxes and deductions). Take that number and multiply by 100. This is your DTI.

Ideally, mortgage lenders like to see a debt-to-income ratio lower than 36%, with no more than 28% of that debt going towards a mortgage or rent payment. While some lenders will allow you to go up to 43% (and sometimes higher), this may not be wise, since it can stress your finances and make you “house poor.”

You Don’t Have Enough Saved for a Substantial Down Payment

One standard rule of thumb is to put at least 20% down on a home’s purchase price. While you may be able to get a conventional mortgage for as little as 3% down when buying a house with student loan debt, making a smaller down payment on a home purchase generally means paying a higher interest rate on your mortgage. On top of that, you’ll likely need to buy private mortgage insurance (PMI).

Also consider that the more you put down on a home, the more equity you’ll have in your home right away — and the lower your monthly mortgage payment will be.

You Might Move Within the Next Five Years

Renting provides more flexibility than home ownership, as you aren’t necessarily tied down to your property. If you think you may want to relocate in the next five or so years, it may make sense to pay off student loans before buying a house.

A common guideline is that it takes around five to seven years or even longer to break even on a house, meaning you have enough equity to recoup that amount of money you put into the house (including closing costs, mortgage payments, and maintenance expenses).

Reasons to Buy a House Before Paying off Student Loans

In some cases, it makes more sense to buy a home before you pay off student loans. Here are some arguments to consider for putting any extra funds you have towards a down payment on a home over paying down your student debt.

Student Loan Debt Is Not as Bad as Other Types of Debt

Not all debt is created equal. Student loans generally have longer repayment terms and typically feature lower interest rates than many other types of debt, such as credit cards and auto loans. Since a down payment will lower the overall cost of your mortgage, it may be smarter to save up money for a home than to pay off a low-interest student loan.

If you have $12,000 in credit card debt, it makes sense to pay that off as quickly as possible, thanks to double-digit interest rates. If you have $12,000 in student loans with a low interest rate, it’s a different story. Paying only the minimum to free up funds to buy a home may be worth contemplating.

Also keep in mind that your student loans may entitle you to a tax deduction — with the student loan interest tax deduction, you may be able to deduct $2,500 or the amount of interest you paid toward your loans, whichever is less.

You Have a Low DTI

If your DTI is 35% or less (meaning a max of 35% of your gross monthly income will go toward your overall monthly debts, including the new mortgage payment), it’s a sign that you can manage home ownership and student loan debt repayment at the same time. With a low DTI, you may be able to comfortably afford your mortgage, monthly student debt payments, and still have some money to put into savings each month.

You Have a Lot in Savings

You’ll generally need to have access to a sizable amount of cash to purchase a home. In addition to making a down payment, you’ll also need to have funds to cover closing costs and moving expenses. Also, keep in mind that when you own a home, you’ll be responsible for all of the home’s maintenance and repair expenses. A general rule is to have1% to 4% of the home’s value set aside for upkeep and repairs.

Generally speaking, if you have enough money saved in the bank to cover those costs, you’re in good shape and can likely afford to buy a house before you pay off your student loans.

Buying a Home Is a Top Priority

When deciding whether to buy a house before you pay off student loans, you’ll also want to consider your priorities and personal goals. For example, if you want to have children (or expand your family) in the near future, you may need a larger space. Or, if you’re working at home (or plan to transition to remote work), you might require a home that allows you to set up a dedicated office. In some cases, prioritizing a home purchase over paying off student debt may be important in terms of your quality of life.

Recommended: How to Use Home Equity to Pay Off Student Debt

Options to Consider for Those Trying to Manage Student Debt and Buy Property

If you’ve decided that you can manage paying down student loans while also saving for a home, here are some tips that may help you with student loan debt and getting a mortgage.

•   Take an inventory of your debts: A first step is to write down all of your current debts, including student loans, car loans, credit cards, and any other debt you hold. Make note of the interest rate, remaining balance, and minimum payment for each.

•   Knock down high-interest loans: Next, you may want to funnel any extra money you have towards the debt with the highest interest rate, while continuing to pay the minimum on the rest. Once that debt is paid off, focus on the debt with the next-highest interest rate debt, and so on. Eliminating expensive debt frees up funds that go towards a mortgage payment. It could help improve your DTI, which is typically helpful when qualifying for a mortgage.

•   Open a dedicated savings account: Consider opening a high-yield savings account specifically for your down payment and home-buying expenses. This could help you track your progress and keep it separate from other money you have so that you may be less likely to spend it on other things.

•   Consider student loan refinancing: When you refinance student loans, you exchange your existing loans for a new loan with a new interest rate and loan terms. Ideally, the new interest rate may be lower if you qualify, which may help you save less over the life of the loan and potentially pay off your loans faster, too.

Recommended: Student Loan Debt Guide

Saving Strategies

The more you can put down on a home, generally the less you will need to borrow. A solid down payment may also help you qualify for a lower interest rate on a mortgage and lead to lower monthly payments. These tips may help you reach your down payment savings goals and qualify for a mortgage.

•   Pay yourself first: Consider setting up an automatic transfer from checking to savings each month to take place right after you get paid. This could help you get used to managing living expenses with what looks like a smaller paycheck, when actually you’re building up your own savings.

•   Take advantage of windfalls: If you receive a lump sum of money, such as a work bonus, gift check, or tax refund, consider funneling it right into your down payment savings account. This will help you meet your down payment goal faster.

•   Reduce expenses: Take a look at where your money is going each month and see if there are any places to cut back. You might decide to cook a few more times a week and spend less on take-out, get rid of a streaming service you rarely watch, or ditch the expensive gym membership and work out at home instead. Any money you free up can go into savings.

•   Start up a side gig: Income from a part-time job or freelance work can be dedicated to savings, potentially helping you reach your goal quicker. You might also consider asking for a raise at your current job or working overtime.

How Refinancing Could Potentially Help Prospective Homebuyers

Buying a home and paying off your student loans may seem like competing goals, but that’s not necessarily the case. You can potentially pay down your debt and save for a down payment at the same time by putting more money into savings each month and looking for ways to lower your student loan payments. For example, with student loan refinancing, you might qualify for a lower interest rate or more favorable loan terms that could lower your monthly payments. You could then use the money you save to put toward your down payment for a home.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Can you buy a house while still paying off student loans?

Yes, it’s possible to buy a house while paying off student loans. However, it can be challenging. Student loan debt can impact your debt-to-income ratio (DTI), your credit, and your ability to save up enough for a down payment. These are all key factors lenders look at when deciding whether to approve you for a mortgage. Paying down your debt, cutting back on your expenses, and starting a side gig to bring in more income, are some options that may help you reduce your debt and save more.

How do lenders treat student loans that are in deferment or income-driven repayment?

If your loans are deferment, mortgage lenders generally use a placeholder payment instead of the $0 due during deferment. How much that placeholder amount may be typically depends on the type of loan a borrower is trying to qualify for. Fannie Mae generally uses 1% of your loan balance, for example, while FHA uses about 0.5%. But these are just general guidelines; individual lenders may treat each situation differently. For student loans in income-driven repayment plans, lenders typically look at what a borrower is paying right now, though rules may vary by lender. For either situation, check with the lender to be sure.

Will refinancing my student loans help me qualify for a mortgage?

Refinancing student loans may help you qualify for a mortgage if refinancing lowers your monthly payment and lowers your debt-to-income ratio. That may also free up more cash that you can put toward a down payment on a house. Just be aware that refinancing federal student loans makes them ineligible for federal programs and protections like deferment and forgiveness.

What government-backed loan programs are easier to qualify for with student debt?

Some of the government-backed mortgage loan programs that may be easier to qualify for with student debt include FHA loans, which typically have lower credit score minimums and allow for higher debt-to-income (DTI) ratios, and USDA loans that don’t require a down payment and typically allow for higher DTI requirements for those buying a home in a designated rural area. Veterans could explore VA loans, which have no down payment and generally allow higher DTIs.

How much should I have saved before buying a house with student loans?

There is no one right answer to this question — it depends on your unique personal and financial situation. Ideally, a home buyer should have saved enough to cover a down payment plus closing costs without completely wiping out their savings. If you don’t have enough saved, you may still be able to qualify for a mortgage with a lower down payment like an FHA loan. But the less of a down payment an individual makes, the higher the interest rate on the loan will typically be and the more they will owe. Saving up for a larger down payment may help a borrower qualify for a better mortgage rate and make their mortgage payments more affordable.

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