Student Loan Guidelines for Getting a Mortgage
Key Takeaways
- It is still feasible to apply for a mortgage while repaying student loans.
- Your debt-to-income ratio is impacted if you have student loans. While some lenders may permit a DTI ratio as high as 50%, you should aim for a ratio of no more than 36%.
- Depending on your situation, it may be preferable to prioritize repaying student loans before making a home purchase.
You can still be eligible for a mortgage even with student loans if you fulfill specific requirements, such as the maximum debt-to-income (DTI) ratio. This is how the amount includes student loans.
Can you get a mortgage with student loan debt?
It is possible to get a mortgage and student loan simultaneously. Your credit score and repayment capacity are the determining factors for your eligibility for a home loan, just like they are for any other kind.
It's only sometimes that having student loan debt lowers your credit score. Your debt-to-income ratio is one of the most important things lenders consider, and student loans will impact it. A high student loan debt load may increase your debt-to-income ratio (DTI) and complicate loan acquisition.
You must determine what monthly mortgage payment you can afford because you must also set aside a portion of your income to repay your student loans.
How student loans impact your DTI ratio
Student loan debt is frequently considered when calculating your DTI ratio, a tool mortgage lenders use to determine your borrower's creditworthiness. This ratio, computed as your monthly debt payments divided by your monthly gross income, assesses your ability to repay a mortgage. The result is a percentage value.
A mortgage lender will add any required student loan and auto loan payments to your proposed mortgage payment and divide the total by your gross monthly income. The outcome should generally be at most 43%; however, some lenders may accept up to 50%, while others may prefer a lower ratio of 36%.
"Depending on whether it's a government-backed loan or not, maximum DTI ratios are typically set at 43 percent," notes Melville, New York's debt relief lawyer Leslie Tayne. For the best chance of getting your loan approved, your monthly debt payments divided by your monthly income should exceed 43% at most. Higher incomes, smaller loan amounts, and less total debt will all result in a lower DTI ratio, increasing your chances of getting approved for a loan.
- A change to an income-driven repayment plan can help you get approved more often by lowering your debt-to-income ratio, according to Tayne. "Making this change at least a year before applying for a mortgage loan is a good idea."
- Look around. Choose a trustworthy lender that can assist you in getting pre-approved by doing some competition research. Donny Schulze, a mortgage banker with Embrace Home Loans in Hauppauge, New York, says, "An experienced loan officer can discuss your student loan situation with you and offer financing programs best structured to meet your budget goals."
- Include another borrower on loan: According to Juan Carlos Cruz, the founder of Brooklyn, New York-based Britewater Financial Group, "extra income always helps with qualification." "This is a simple method to lower your debt-to-income ratio, but make sure your co-borrower has excellent credit and little to no debt."
- Extend your search by purchasing a smaller, less expensive home or one in a more reasonably priced neighborhood.
- Wait it out: According to Tayne, "You can increase your chances of being approved by saving up for a larger down payment, reducing your debt, and allowing any negative information on your credit report to age."
- For lower-income borrowers, the Fannie Mae HomeReady loan offers a low down payment option with cancelable mortgage insurance.
- A comparable low-down-payment option for borrowers with lower incomes is the Freddie Mac Home Possible loan, which allows borrowers to apply sweat equity towards closing costs or the down payment.
- Freddie Mac Another low-down-payment option Freddie Mac provides exclusively to first-time homebuyers is the HomeOne loan.
- FHA loan: protected by the Federal Housing Administration (FHA) and only needs a 3.5% down payment
- VA loans require no down payment or mortgage insurance and are available to veterans, active-duty service members, and their surviving spouses.
- USDA loans are available to borrowers who live in designated "rural" areas; visit the USDA website to verify your eligibility.