Qualifying for a Mortgage With Student Loan Debt

 February 25, 2020
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Student loans — in moderation — can help you achieve your educational and career goals, but high student loan debt can also impact your future plans, like qualifying for a mortgage to buy a house.

Many factors determine your eligibility for a mortgage, and although student loans can significantly affect the home-buying process, they don’t need to keep you from your dreams of being a homeowner. Here’s what you need to know:

Qualifying for a mortgage with student loans
How student loans affect the mortgage process
Other factors in getting a mortgage
Make a plan, accelerate debt payments and be prepared to wait
Refinancing student loans en route to home ownership

Qualifying for a mortgage with student loans

A 2018 Student Loan Hero survey found 43% of U.S. graduates were waiting to purchase their first home due to student debt. But if you believe you can afford to make payments on a home (while paying your other debts), you just need to find a lender who agrees with you.

Lenders look at your debt-to-income ratio (DTI) before offering a mortgage because it’s how they determine whether or not you can afford a mortgage loan.

There are two parts to a DTI — the front-end and the back-end.

Front-end and back-end DTI

A front-end ratio is also known as the housing ratio. This ratio is found by dividing your projected monthly mortgage payments by your gross monthly income (your income before taxes).

Your projected mortgage payment will include the costs of the principal, taxes, insurance and interest payments, collectively known as PITI.

Your lender will set the terms of the limit for conventional loans. Depending on the lender, expect a limit of approximately 28% for the front-end ratio. Federal Housing Administration (FHA) loans, however, do allow for a maximum front-end ratio of 31%, as of 2019.

The back-end ratio accounts for all of your debt obligations in comparison to your income. The lender will find this ratio by adding your monthly debt payments to your housing expenses, then dividing that number by your gross monthly income.

As well as the PITI on your mortgage, these debt payments will include child support, credit card minimum payments and — yes — student loans.

Here’s the rub: typically, many conventional lenders prefer to see a back-end ratio under 36%. If you take out an FHA loan, the highest back-end ratio you can hold is 43%, as of 2019. Some potential borrowers may qualify for an FHA loan, but perhaps not a conventional loan. Check out Student Loan Hero’s DTI calculator, but if the numbers aren’t what you’d like to see, don’t panic.

How student loans affect the mortgage process

Student loans by themselves cannot prevent you from getting a mortgage. As previously mentioned, the effect of the student loans on your debt-to-income ratio is the key deciding factor. When you go to a lender seeking a home loan, they are going to look at your front and back-end debt-to-income ratios, your credit history, your assets, income and work history and how large of a down payment you have available.

If you have high monthly student loan payments, but no other debt, and a decent income, and you’re looking for a reasonably-priced home, you’ll likely be fine when you apply for a home loan. (If you’re not sure, however, crunch the numbers yourself.) If, however, those debts push you past the lender’s debt-to-income threshold, then yes, your student loans may prevent you from qualifying for a home loan.

Other factors in getting a mortgage

Besides your front-end and back-end ratios, lenders also consider other factors when considering you for a home loan. Here are three other important items:

1. Debt and your credit score

Some lenders will allow you to hold a back-end ratio that’s as high as 50%, if you have great credit — this is uncommon, but not impossible. If you have other loans with small balances wiping out this loan in its entirety could help bring your DTI score to a better place. Credit scores matter too: if you are planning to apply for a FHA mortgage, your FICO score must be at least 500; for a conventional mortgage, at least 620 for most lenders.

2. Size of downpayment

The size of your available down payment will affect your front-end ratio — the more you borrow, the higher the PITI. If you can save a 20% or more down payment, your student loans are far less likely to affect your loan process.

3. Your income and job history

Income is a key factor in determining your acceptance for a loan. The concept of debt-to-income ratio (both front-end and back-end) pits two variables against each other: your debts and your earnings.

This may be one of the reasons why a Zillow report shows that student loans have a negligible impact on getting a mortgage as long as you have a bachelor’s degree or higher. Sure, you have loans — but you might also have a higher income. It’s tempting to focus on debts, but if you can boost your earnings (perhaps by negotiating for a raise), you’ll also improve your debt-to-income ratio.

Did you spend several years of your adult life completing graduate school? The loans themselves may not affect your ability to secure a mortgage, but your employment history might. Unfortunately, as part of the credit history portion of certifying you for a loan, some lenders may not accept your income numbers unless you have at least two years of employment history. Other lenders may be satisfied if you at least stay for two years within the same industry. So if you’re fresh out of school, you might not be able to secure a mortgage until you’ve held a steady job for a year or two.

Make a plan, accelerate debt payments and be prepared to wait

If education debt is making your debt-to-income ratio too high, consider looking for ways to pay off your student loans faster. There’s no penalty for prepaying student loans, so you can make extra payments anytime.

To achieve this, you’ll either need to find room in your budget through saving or making extra income. Small lifestyle changes could help you free up more of your monthly income. Alternatively, you could find a part-time job or start a side hustle for some extra cash. Driving for Uber, walking dogs in your neighborhood or finding freelance work online are all options for boosting your income.

Although lending rules can sometimes feel burdensome, they are there to protect you from taking on debt you can’t afford to pay back. Spending a few more years getting your student loans or other debts paid down could allow you to qualify for a lower interest rate or higher mortgage amount in the future.

Plus, once you have a better credit score and longer employment history, you will even have more options when you’re finally ready to take the leap into homeownership.

Refinancing student loans en route to home ownership

Restructuring your debt through student loan refinancing may be one way to afford a mortgage loan. Creditworthy borrowers — or those who apply with a creditworthy borrower — can qualify for low interest rates, thereby saving money on their loans. You can also choose a shorter repayment term to get out of debt fast. Just make sure you research all the pros and cons of refinancing before making changes to your loans.

As long as you understand the process, refinancing with a private lender could be another strategy for getting out of debt ahead of schedule and seeing your debt-to-income ratio decrease as a result.

So, does a student loan affect your ability to get a mortgage? Yes, it can — but there are ways to whittle down your student debt and still qualify for one.

Refinancing student loans, improving your credit score, renting for a few extra years and lowering your DTI ratio are all ways to improve your chances of qualifying for a mortgage and buying your first home.

Maya Dollarhide and Michael Kitchen contributed to this article.