Student Loans and Mortgages

Can You Get A Mortgage If You Have a Student Loan?

Contrary to popular belief, you absolutely can get a mortgage if you have unpaid student loans! Whether you have student loans or not is not one of the factors that could cause you to be denied a mortgage.

However, the payments you owe on your student loans and the status of that loan will be considered as part of granting or denying your mortgage loan application.

How is Student Loan Debt Calculated For a Mortgage

Another popular belief is that the amount of your student loan is what will disqualify you from getting a mortgage. That is not true. The amount you have to pay each month is the key factor mortgage lenders consider as they’re deciding whether to grant you a loan.

The main place this applies is called the debt-to-income ratio, commonly abbreviated as DTI.

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To calculate your debt-to-income ratio, your mortgage lender will take all of the loan payments you owe each month (car payments, rent, credit cards, student loans, etc.), add them all together, then divide by your gross monthly income (your income before all the taxes and benefits are taken out of your paycheck.)

Most mortgage lenders are looking for that number to be 43% or lower. (Some are tight, and won’t approve your loan if your DTI is over 35%, some are looser and will allow your DTI to go as high as 50%)

That’s lots of numbers, so here’s an example. Let’s say your job is paying you $60,000 per year (congratulations!). To get your monthly gross income, the mortgage lender would divide that by 12. So your monthly gross income would be $60,000/12 = $5,000 per month.

If your mortgage lender was looking for a 43% DTI, they would multiply $5,000 * 0.43 = $2,150. 

They’d then add up all your monthly debt payments, looking for the total debt payments you owe each month to be less than $2,150.

Let’s say that your monthly debt payments were:

• Student Loan: $1,000
• Rent: $   500
• Car Loan: $   450
• Credit Card Payments: $   150

    Total $2,100

In this case, you’d be just under 43%, so that’s good. You just squeaked by in passing that loan criterion. That doesn’t mean you’ll get the loan, because there are other factors they’ll be considering, but at least your debt-to-income ratio didn’t disqualify you from getting the loan.

What if Your DTI is Too High?

But what if you had another loan with payments of $300 per month? Now your total monthly debt payments will be higher than the amount allowed by the mortgage lender, probably resulting in a denial of your loan.

You’ve got several options to do this:

• Shop around to find a lender who would give you a mortgage with a higher DTI ratio.

Realize if you do, you’ll end up paying a higher interest rate, meaning your mortgage payment will be higher every month for the next 30 years. (Note, this is not the ideal option.)

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• Pay off a loan.

By eliminating one or more loans, you’ll decrease the amount of monthly debt owed, potentially bringing your debt-to-income ratio into the acceptable range to receive your mortgage.

Ideally, you should do this 3 – 6 months before making your mortgage application, so it’s clear those loans are no longer obligations you need to pay.

• Increase your income.

Getting another job, a better job, or adding self-employment income will also improve your debt-to-income ratio by changing your gross income amount. 

You’ll want to do this at least 6 months in advance for the mortgage lender to view this income as valid in your loan application (12-24 months if it is self-employment income.)

• Look at a different type of loan.

While you may not be able to qualify for a standard, conventional loan, you may be able to qualify using a government-backed loan.

For example, FHA loans have a 57% debt-to-income ratio requirement. Or, if you’ve served in the military or the National Guard, you may be able to qualify for a VA loan, which has a 60% debt-to-income requirement. Talk with a mortgage lender before applying, to see if you could qualify for these types of loans and how your student loans will be considered by that type of loan.

• Refinance/Consolidate your student loans.

Depending on the types of student loans you have and their interest rates, you may have the option of refinancing and/or consolidating them which could result in lower monthly payment requirements.

You’ll want to do this at least 6 months before applying for your mortgage and to make all your payments on time so you’ve got a nice, clean credit report as you go into the mortgage application process.

• Delay your home purchase until your income increases or your debt decreases.

Many people become so focused on buying a house right now that they forget that if they spent several months focusing on improving their financial situation they may be able to qualify for a mortgage or a better loan. In saying this, we recognize that sometimes rising interest rates or a hot housing market may make it very desirable to buy right now, but sometimes delaying that purchase is a better option.

How are Student Loan Payments Calculated For A Mortgage?

If you are in a typical student loan situation, with simple payments of $x per month, that is the amount that will be included in your debt-to-income ratio.

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But, increasingly, not everyone fits into that simple model. For example, you may have some kind of IBR (Income-Based Repayment) based payment plan. These plans base their payments on your income, in other words, your ability to pay. That rate is reevaluated each year to determine the next year’s payment due.

Unfortunately, this causes a challenge for the underwriters considering your loan application. Some mortgage loans allow IBR-based payment amounts to be counted for your debt-to-income ratio calculation. Many, however, count the full amount you would normally be paying in your DTI ratio, even though you are not required to pay that amount. 

This article talks about each of the different loan types and how this rule applies to that type of loan.

Now, let’s get back to the question we started with:

Can You Get a Mortgage With Student Loan Debt?

Great news – yes, you can, as long as the combination of your debt and your income meets the requirements your mortgage lender has to be able to approve your loan.

If you’re not quite there yet, don’t give up hope. Now you know the different options you can pursue to be able to qualify in the future. Set goals and start working towards them, and you could be into a house faster than you might have thought possible!