If you’re considering buying a house, you may also be thinking about your overall financial picture and asking yourself questions like: What’s my credit score like? What can I afford with my current monthly income? Will I get approved for a home mortgage with how much debt I currently have?
If you have student loans, the last question may be particularly worrisome. Too much debt can prevent you from qualifying for a mortgage.
Getting a mortgage with student loans doesn’t have to be out of reach. Here’s what you need to know about student loan debt and buying a house.
Why do lenders look at student loan debt?
Lending is a risky business, which is why a borrower’s risk profile is among the top considerations for lenders. Before giving you money, a financial institution will want to know that you will be able to make your mortgage payments. They assess this by looking at several key things, including:
- Your income for the past few years
- Your credit report, which includes factors like your repayment history, credit inquiry history, and more
- How much debt you currently owe
Having too much debt can be a sign that a borrower has too many existing obligations and might struggle to pay an additional bill each month. Lenders typically like to see a debt-to-income ratio of 43%— or sometimes even 36%— or less.
What is DTI and how is it calculated?
Your debt-to-income ratio (DTI) is a comparison of your total amount of debt to how much money you earn. This number is a measure that lenders use to help them determine risk. The ratio is determined by dividing the sum of your monthly debts into your verifiable monthly income.
For instance: If you have a $300 monthly car loan and $300 in student loan payments each month, your total monthly debt payment would be $600. If you brought home $5,000 a month, your debt-to-income ratio would be $600/$5,000 or 12%.
Can I get a mortgage with student loans?
The short answer is yes! Even though high student loan debt can certainly impact your DTI, you still have options.
Professional Lending Programs
Professional lending programs can provide different loan requirements for certain professions. These programs, which are offered by individual financial institutions, are designed for people who may have a larger salary or bigger potential long-term financial stability but have little to no money saved up or huge amounts of debt that would otherwise disqualify them from a mortgage.
The specifics of these programs vary from bank to bank, but oftentimes they allow borrowers to:
- Obtain a loan with little to no down payment
- Choose from a variety of loan options
- Get a loan without PMI
Professional mortgage programs are typically open to early professionals in high-earning fields such as medicine, law, and more. Every lender has a different criteria for who qualifies for these programs and what benefits can be included.
New Lending Rules for FHA Loans
In addition to professional lending programs, new rules have been implemented in favor of borrowers, particularly when it comes to FHA loans.
Former Federal Housing Administration (FHA) rules required mortgage lenders to calculate student loan payments at 1% of the total outstanding student loan balance on loans that are not fully amortizing or in repayment. Essentially, this means that for every $100,000 you have in student loan debt, a monthly payment of $1,000 would be recorded on your FHA loan application— regardless if this is far above what you actually pay each month. The result was an inflated DTI for many borrowers.
With the new rule, however, FHA lenders dropped the requirement. Instead, lenders now use actual student loan payment amounts to determine eligibility for FHA loans. This can significantly reduce your DTI, making it easier to qualify.
Other Options for Getting a Mortgage with Student Loans
If a professional lending program or the new rules don’t benefit you, you still have a few more options that can help get your credit in better shape before buying a home.
- Refinance or consolidate student loans: Refinancing private student loans or consolidating federal student loans can leave you with better loan terms that lowers your monthly student loan payments. Please keep in mind: refinancing or consolidating can affect income-based repayment plans or even public service loan forgiveness programs. It’s very important to check with your loan servicer on the potential impact to your loans before you consolidate or refinance.
- Pay off other debts: Have other debts that you can quickly eliminate? Pay those off, starting with the most expensive, high-interest debts.
- Increase your income: If you are truly unable to lessen your debt burden in any way, you can improve your DTI by earning extra income. Whether it’s a freelance side-hustle or temporary second job, bringing in more money each month can raise your income and lower your DTI.
When in doubt, work with a lender or other financial professional to determine the best course of action for improving your loan application.
Even if you’ve managed to get your student loan balance lower, you may still be nervous that you won’t get approved for a loan when it comes time to apply for financing. Getting prequalified or preapproved for a loan before you start your house search can help soothe your fears and make you a more attractive buyer when it’s time to submit an offer.
To get prequalified, you’ll submit your financial paperwork to a lender who will then look over all of your information. They’ll determine whether or not you meet the basic loan requirements and let you know the maximum amount that you’ll be able to borrow.
When you walk into an open house with a prequalification in hand, it signals to agents and sellers that you’re a serious buyer. Similarly, knowing how much you can borrow gives you a budget to work with and peace of mind during your search.
Work with a Lender that Understands
To a big-box bank, you may just be another account number. With a local credit union, you’re a member of the community. If you’re hoping to purchase a home in the near future, look for a lender like Amplify that is willing to work with you to find a solution that gets you in the home of your dreams.