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Do Student Loans Affect Buying A House?

Jeff Seehorsch7-minute read
May 26, 2022

Student loan debt soared beyond $1.7 trillion in the U.S. last year, according to the Federal Reserve.

It’s no wonder many Americans are delaying their purchase of a new home, either because of difficulties getting a home loan or doubts about being able to cover student loans and a mortgage at the same time. The good news is that by focusing on the right aspects of your finances now, you may be able to both manage your student loan debt and become a homeowner sooner than you think.

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Buying A House With Student Loans: Is It Possible?

If you’re someone who has student loans, you’ll be happy to hear that you don’t need to be completely debt-free in order to purchase a house. However, just because you can purchase a house with student loans doesn’t mean that your loans won’t affect your eligibility. Let’s take a look at how student loans impact the factors that lenders look at when assessing your mortgage application.

Student Loans And Your Credit Score

If you’ve ever taken out a loan, opened a bank account or received a credit card in your name, you have a credit score, a three-digit number that reflects your payment history and how many accounts you have in good standing. Lenders use this number to determine the risk associated with giving you a loan. A good credit score and clean credit history give lenders confidence that you will repay your loan on time.

Whether you have $1,000 or $100,000 in student loan debt, your balance should not affect your credit score. What will affect your score is making (or not making) monthly payments on time. In this way, a student loan is no different from a car loan or a home loan. If you have trouble remembering to make your payments on time, try setting yourself a reminder on your phone or computer, or marking your payment due dates on a calendar that you look at every day.

Student Loans And Your Debt-To-Income Ratio (DTI)

In the eyes of banks and lenders, your debt-to-income ratio is another crucial aspect of your ability to repay a loan. In this case, the lower your ratio, the better home loan terms you can lock in. This percentage, which is calculated by dividing your recurring monthly debt by your gross monthly income, tells lenders how much of your monthly income goes to recurring bills.

In most cases, your DTI will need to be under 43% to get a qualified mortgage that meets federal government standards. Most lenders prefer to see a DTI below 36%, as this gives you much more wiggle room to cover your mortgage payments.

Just like any debt, student loans are factored into DTI, and it’s one reason why many non-homeowners are delaying buying a home.

Student Loans And Your Down Payment

A down payment is how much you pay out of pocket to buy a home. It shows bankers, lenders and home sellers that you’re a serious buyer. By paying more upfront, you can earn better mortgage terms and increase your chances of getting a purchase offer accepted. But, trying to save enough for a down payment on a house can be understandably difficult when your student loan payments tie up so much cash each month.

Most conventional loans that offer the best rates will require you to put down 20% of a home’s sales price. Put down less, and you’ll have to chip in private mortgage insurance. But don’t think 20% is a must. Most first-time home buyers put down far less, and you can put down as little as 3% if you have strong credit.

If possible, try not to let the down payment scare you away from buying a home. There are financial benefits that come with homeownership that could make it worth your while to save for a down payment while you pay down debt. For one thing, owning a home can be less expensive than renting. The sooner you have enough money for a down payment, the less money you’ll sacrifice by living in an apartment. Plus, owning a home allows you to build equity. In time, you can refinance your home loan to put that equity toward your student loans.

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We’ve gone over the ways in which your student loans can affect your ability to buy a house, but what can you do to combat these issues? Buying a house with student loans can be possible for many. Let’s explore some steps you can take to move you closer to homeownership despite your student loan payments.

Boost Your Credit Score

Of the many home buying dos and don’ts, building your credit score is one of the most doable actions you can take. You can make positive gains regardless of how high your student loan balance is, and this can help you unlock the best mortgage options. Shoot for a credit score of 760 or higher to get the lowest interest rate possible.

Here are a few tips to raise your score:

  • Make timely payments. A lot goes into a credit score, but on-time payments are the most important factor. The surest way to build your credit is by making monthly payments on time for all your accounts: car loan, rent, mortgage, cell phone, credit cards and, of course, student loans.
  • Expand your credit limit. Most experts agree it’s best to keep your credit utilization ratio below 30%. Say you only have one credit card with a $5,000 limit, and you charge $2,000 per month. That means your credit utilization ratio is 40%. If you raise your limit to $10,000 and spend the same amount, your ratio drops to 20%. That’s good news for your credit score. To raise your credit limit, just raise the limits of your current cards or open a new one.
  • Split monthly payments. Not all credit card companies report your balance at the same time. That means your credit utilization ratio could be considered higher or lower depending on when you make monthly payments. One way to prevent charges from building up – and weighing your credit score down – is to split your monthly payment. By making two payments a couple weeks apart, you can improve your chances of a lower ratio being reported.

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Lower Your DTI

Generally speaking, you either need to lower your debt or raise your income to improve your DTI. That usually means creating a strict budget, scaling back spending and/or picking up a side job to earn some extra cash.

Paying Down Debt

If money is tight, one method is to pay down your highest-interest debt first to save more in the long run. Paying off other debt can help improve your DTI and make it more possible to afford a house. If you have several sources of debt, target the highest-interest debt loans first, rather than let autopayments spread your wealth around. Pay the minimum for the lowest-interest loans.

Consolidating Your Debt

Another option is consolidating your debt. If you’re making payments on several credit cards, consolidating those balances onto one credit card means you could lower how much you need to pay per month. If you’d rather pay off some of your cards instead of consolidating, don’t close your cards after your balance hits zero! Keeping your cards active will help boost your credit score.

Research Down Payment Assistance Programs

There are many down payment assistance programs available to help offset the initial cost of buying a house, especially for first-time home buyers. Be sure to research all of the available options to see if you qualify for help with your down payment.

Explore Other Types Of Assistance

Fannie Mae created policies in 2017 to help out people who are struggling to buy a home because of student loan debt. The following policies can potentially give you some financial breathing room or provide more mortgage options to help you become a homeowner.

  • Student loan cash-out refinance: Offers homeowners the flexibility to pay off high interest rate student debt while potentially refinancing to a lower mortgage interest rate.
  • Debt paid by others: Widens borrower eligibility to qualify for a home loan by excluding from the borrower’s debt-to-income ratio non-mortgage debt, such as credit cards, auto loans and student loans that are being paid by someone else.
  • Student debt payment calculation: Makes it more likely for borrowers with student debt to qualify for a loan by allowing lenders to accept student loan payment information on credit reports.

Explore Different Types Of Loans 

All potential home buyers and especially those with student loans should explore the different types of home loans they qualify for. Different loans have various requirements, and your student loans could make you a better fit for one type of loan versus another. For example, you may not qualify for a conventional loan if you have a high DTI ratio, but Federal Housing Administration (FHA) loans and Department of Veterans Affairs (VA) loans have more lenient requirements that may keep you qualified.

Live Below Your Means

It’s tougher to save for a down payment when you’re funneling a few hundred dollars toward student loan debt every month. For many Americans, it can seem like an either/or proposition: either pay down debt or save for a home.

One way to ensure you have extra money to stash away each month is to live below your means. Take a hard look at your spending habits and cut every expense you can: eating out, clothes, vacationing, etc. You may even consider moving back in with your parents if you’re paying a big chunk of your income toward rent.

Increase Your Income

This one isn’t always possible, but there are a few options to increase your monthly income. If you’re an hourly employee, try to pick up one or two extra shifts a week. Or consider adding a side job temporarily. Not only will additional income improve your DIT ratio, it will also give you extra money to save for your down payment.

Refinance Your Student Loans

Another way you can ease some of the burden of student loans is by refinancing them. If you’re paying high interest rates (over 5%), you may be able to sell your loan to a private lender that offers rates as low as 2.5%. Private lenders typically have requirements that must be met, usually to do with your income, credit score and DTI. Refinancing can lower how much you spend long term, as well as your monthly payments, allowing you to put more toward a down payment.

The Bottom Line

There’s no two ways about it: managing student loans can be difficult. But millions of other people are in the same boat as you and new channels are opening up to make homeownership a realistic goal. There are plenty of steps you can take to prepare financially. By focusing on what you can control and exploring all your options, you can overcome student loan debt and buy your first home with confidence.

If you’ve been getting your student loans and other finances in order and ready to begin the home buying process, get started with Rocket Mortgage®.

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Jeff Seehorsch

The Rocket Homes blog is here to bring you all you need to know about buying, selling and making the most of your home. Whether you’re thinking about becoming a homeowner, selling your current home or looking to keep your place in tip-top shape, our writers and freelancers bring their experience and expertise to meet you right where you are.