How to Qualify For a Mortgage With Student Loan Debt

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Student loans — in moderation — can help you achieve your educational and career goals. But as I’m sure you already know, they can also have a downside for years after graduation.

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One of these long-term consequences is that your student loans can impact whether or not you’ll qualify for a mortgage.

While many factors determine your eligibility for a mortgage, student loans, due to their balance size and long-term repayment schedules, can significantly affect the home-buying process.

If you have student debt and are thinking about buying a home, here’s what you need to know.

Getting a mortgage with student loans

Here’s the crux of the issue: Are you able to handle a mortgage payment?

You might say “yes.” But your lender may say “no.”

Your lender is going to look at both your front-end and back-end debt-to-income ratio (DTI) to determine the amount you can afford for a mortgage loan.

Front-end ratio

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.

For example:

  • You earn $50,000, which is $4,166 per month
  • Your PITI comes to $1,200 per month
  • $1,200 / $4,166 = 0.29, or a front-end ratio of 29%

Your lender will set the terms of the limit for conventional loans. Depending on the lender, expect a limit of 28% for the front-end ratio.

Federal Housing Administration (FHA) loans allow for a maximum front-end ratio of 31% as of 2018.

Back-end ratio

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 and then dividing that number by your gross monthly income.

These debt payments include the PITI on your mortgage, child support, credit card minimum payments, and — yes — student loans.

Here’s an example:

  • You still earn $50,000, or $4,166 per month
  • Your PITI is still $1,200 per month
  • You have a small credit card balance with a $50 per month minimum payment
  • You have a student loan with a $375 per month minimum payment

What’s your back-end ratio?

  • Your monthly debt payments come to $1,625
  • $1,625/$4,166 = 0.39, or 39%

Here’s the rub: Typically, 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%.

In this example above, you could qualify for an FHA loan, but perhaps not a conventional loan. This illustrates how student loans (and other debt) can interfere with your ability to qualify for a mortgage.

Don’t worry, though. There are other options.

  • 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 (like the small credit card balance in the example above), wiping out this loan in its entirety could put you over the edge.
  • You could also look for a less expensive house with lower PITI.

Student loans and mortgages: Other deciding factors

Besides your front-end and back-end ratio, lenders also consider other factors when considering you for a home loan. Here are three of the most important.

1. How big your down payment is

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 percent down payment, your student loans are far less likely to affect your loan process.

2. How much money you make

Your 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 also probably 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.

3. How long you’ve have your job

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, certain lenders won’t accept your income numbers unless you have at least two years of employment history. Others will be satisfied if you at least stay for two years within the same industry.

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.

How student loans affect the mortgage process

Student loans by themselves cannot prevent you from getting a mortgage. 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 ratios, your credit history, your assets, and how large of a down payment you have available.

Remember, your back-end ratio considers all of your monthly debt payments. This includes your student loan payments, car payments, credit card, and personal loan payments.

If you have high monthly student loan payments but no other debt, you have a decent income, and you’re looking for a reasonably-priced home, you will most 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.

Find ways to pay off your student loans faster

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.

A third option is restructuring your debt through student loan refinancing. 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.

Sometimes it’s worth the wait

Although lending rules can sometimes feel burdensome, they are there to protect you from taking on debt you can’t afford to pay back.

If your student loans are preventing you from qualifying for a mortgage, look for ways to get out from under this debt. While it might be frustrating to have to continue to rent for the time being, it could be worth the wait in the long run.

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.

Rebecca Safier contributed to this article.