How can I buy a house with student loan debt? (Podcast)

Aly J. Yale
The Mortgage Reports contributor

Buying a house with student debt? You’re not alone

Student loan debt can feel like a burden. But it doesn’t have to hold you back from your goals — especially buying a home. 

As mortgage advisor Ivan Simental said in a recent episode of The Mortgage Reports Podcast, “You absolutely can buy a house with student loan debt.”

Are you hoping to buy a home but have student loan debt in tow? Here’s what to do.

Verify your home buying eligibility with student debt. Start here (Dec 5th, 2021)

Listen to Ivan on The Mortgage Reports Podcast!


Two tips to buy a home with student loan debt

Student loan debt can have a big impact on your homeownership plans.

When you’re making hefty loan payments every month, it means there’s less money left over for a mortgage payment. And that can reduce your home buying budget.

If you’re worried about student debt loan when purchasing a home, there are a couple of strategies that can really help your chances of success:

  1. Reduce your debt to income ratio by paying down smaller loans and keeping card balances low
  2. Increase your credit score as much as possible to improve your borrowing power

In short, student loans might affect your housing budget — but they shouldn’t prevent you from buying altogether.

Talk to a mortgage lender about your loan options and find out how much house you can afford.

Verify your home buying eligibility with student debt. Start here (Dec 5th, 2021)

Strategy 1: Reduce your debt-to-income ratio

Your debt-to-income (DTI) ratio reflects how much of your monthly income is taken up by debts, and it plays a major role in any loan application. 

According to Simental, DTI is particularly important when buying a house.

“We [mortgage lenders] want to make sure that you are 1) responsible and 2) you can actually afford the payment,” he said.

Typically, mortgage lenders will assume your student loan payment is 0.5% to 1% of the total loan amount. They’ll then add this payment to any other debt payments you might have (car loans, credit cards, etc.) and measure it against your income. This lets them know what mortgage payment you can comfortably afford.

To ensure you have the highest chances of qualifying for a mortgage, you’ll want to keep your debt-to-income ratio as low as possible. These five tips can help:

Avoid credit card debt

You’ve probably gotten tons of credit card offers over the years — some may have even come with serious perks, like free airline miles or interest-free periods. While these can be tempting, it’s important to avoid credit card debt as much as possible.

Not only does credit card debt increase your debt-to-income ratio, but it can also hurt your credit score (and that impacts your mortgage application, too!)

“Do not get into credit card debt,” Simental said. “Just say no. I promise you will not regret this advice.”

Pay down your other debts as much as possible

You probably can’t pay off your student loan debt right away. But if you can lower some of your other, smaller balances, it will help your debt-to-income ratio immensely.

This might mean making an extra payment on your car loan, paying off your credit card, or putting an extra $100 toward some other loan or debt you might have.

Increase your income

A higher income will also lower your DTI ratio, so ask your boss for a raise, take on a side hustle, or increase your hours, if possible. If you can bump up your take-home pay, it can help your mortgage application. In some cases, it can even help you qualify for a bigger home loan.

Refinance or consolidate your student loans

Refinancing your student loans can help you get a better interest rate and a lower monthly payment, which will reduce your debt-to-income ratio, too. If you have multiple loans, you can think about consolidating them — or rolling them into one single loan. This can often reduce your payment as well.

Consider an income-based repayment plan

If you have federal student loans, you can enroll in what’s called an income-based repayment plan. These plans base your monthly payment on your salary — so if you don’t make much, your payment will be incredibly low as a result. This not only makes it easier to manage your student loans, but it lowers your DTI, too. 

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Strategy 2: Increase your credit score

In addition to your debt-to-income ratio, your credit score will also play a prime role in your ability to qualify for a mortgage loan.

As Simental put it, “If you have a lower FICO score, then you’re considered a riskier borrower. Lenders wonder, ‘Why do you have a low credit score? What have you done to make it low?’”

The exact credit score you need to qualify will depend on your mortgage program. However, borrowers with a credit score of 740 or higher typically have the widest range of loan options and best interest rates. 

If your credit score is on the low end, there are a few steps you can take to increase it. You can:

Lower your credit utilization

Your credit utilization rate — the percentage of available credit you’re actually using — makes up a big chunk of your FICO score.

For example, if you have a $10,000 credit line and a $9,000 balance, you’re using 90% of your available credit. If your balance was just $1,000, you’d have a 10% utilization rate.

Generally speaking, the lower your credit utilization is, the better your score. High utilization rates tell lenders “that you are not able to manage your money correctly,” Simental said. 

Pay your bills on time

Payment history is another factor in your credit score — and late payments can hurt it significantly. 

“If you’re past 30 days late, that is where it’s going to ding you,” Simental said. “And that is very, very hard to get rid of.”

Late payments also show lenders that you’re not responsible with your debts. After all, what’s to stop you from being late on your future mortgage, too?

To prevent late payments from hurting your chances of buying a house, consider setting up autopay on your accounts and utilities. This will ensure your bills are paid on time, every time.

Keep your accounts open

It can be tempting to close out a card or account once you’ve paid off the balance. But in the credit score world, doing so can actually hurt you.

That’s because credit history — or how long you’ve had an account — factors into your score. In fact, it makes up 15% of it!

“If you are going to pay off an account or if you’re going to keep your credit card at zero balance, make sure not to close it,” Simental said. “If you close it, you’re going to lose all that good credit history that you have with that account.” 

Avoid new credit lines

Finally, don’t take out new credit cards or loans if you plan to buy a house soon. These only tempt you to spend more, plus add a credit inquiry to your report. These decrease your score and can hurt your chances of getting a mortgage.

Talk to a mortgage pro

Once you’ve prepped your credit score and minimized your debt-to-income ratio as much as possible, it’s time to talk to a mortgage professional.

They can walk you through the home buying process, give you tips and tricks for improving your application, and help you choose the right loan product for your budget and goals. 

Your loan officer will also help you get pre-approved for your mortgage, which is the first step toward buying a house. Once you’re pre-approved, you can start searching for that dream home.

Verify your new rate (Dec 5th, 2021)