Student loan debt can be a drag on your homeownership dreams. In fact, according to Student Loan Hero’s Student Loan Burden Report, about 41 percent of Americans with student loan debt have put off buying a home or apartment due to their student debt.
It’s certainly possible to buy a home when you have student debt. However, you might need to approach your home purchase differently if you’re balancing student debt, too. Before you decide to apply for a mortgage, consider the impact of refinancing your student loans.
Depending on your situation, refinancing your student loans can either help or hurt your chances of getting approved for a home loan. Carefully consider your own circumstance and consider consulting with a financial professional before moving forward.
Does student loan refinancing hurt your credit?
Because your credit is the first thing mortgage lenders look at, make sure that refinancing your student loans won’t hurt your chances of qualifying for a mortgage.
“A refinanced student loan will appear as new debt on a credit report and could have a negative impact on the buyer’s credit score in the short-term,” said Ken Pederson of Fairway Mortgage in Lancaster, Pennsylvania. “Lower credit scores can impact interest rates on their mortgage, the cost of private mortgage insurance, and even the ability to qualify for a home mortgage.”
The hit to the wallet depends on your personal situation and how much your credit drops due to refinancing your student loan. In general, the bigger hit to your score, the higher your costs will be. But according to Credit Karma, refinancing impacts are somewhat minimal and can be recovered from in a relatively short period of time.
If you plan to buy a home in the next couple of months, “Sit tight, buy your home, and refinance” your student loans after you close on the home, Pederson said.
Pederson said that “new” credit in the form of student loan refinancing probably won’t cause credit problems in the long run if you pay on time. Once you start making regular payments on your refinanced student loan, the effect on your credit score becomes positive.
If you have a longer time frame before buying a home — at least six months — Pederson pointed out that it can be an advantage to refinance your student loans to a lower monthly payment first.
Student loan refinancing can help you buy a home
In some cases, planning to refinance your student loans first can improve your ability to buy a home.
“Refinancing student loans reduces your monthly [debt] obligations, which lowers your debt-to-income ratio,” Green said. With less of your monthly income going toward debt repayment, your numbers look better — especially in terms of the 28/36 qualifying ratio.
You can present yourself in an improved light by refinancing first. However, your student loan refinance has to result in a lower monthly payment for this advantage. Usually, refinancing to a longer term with a lower interest rate will reduce your monthly student loan payment.
Another benefit of lowering your debt-to-income ratio is that you could be preapproved for a larger mortgage amount. A bigger mortgage means a bigger home in many cases. “At today’s mortgage rates, every dollar you save on a student loan refinance raises your maximum mortgage size by $210,” Green said.
But if you don’t care about a bigger mortgage to buy a bigger house, continued Green, it might not matter what you do first if you already qualify for a mortgage.
Pay attention to the home loan program
Before you take the plunge, Pederson suggested discussing your options with a mortgage loan officer. Depending on the mortgage lender and the home loan program, their view of student loans might be slightly different.
A conventional mortgage might have slightly different underwriting requirements related to student loans than an FHA loan, VA loan, or USDA loan. “All these programs have slightly different viewpoints on how lenders should look at student loans, especially if they are in deferment,” said Pederson.
Talking to a loan officer or mortgage broker can give you an idea of your options. Plus, a broker can help you navigate the realities of student loans, refinancing, and buying a home.
The same applies if you hope to use grants to help you with your down payment. Talk to someone knowledgeable about the options as you make your choice.
Don’t refinance your student loans while a mortgage is pending
It’s perfectly acceptable to refinance your student loans before or after closing on a home. But experts caution against beginning the process while the mortgage is pending.
Have you already started the mortgage process? Even if you’re approved and the home is under contract, Pederson and Green both recommend that you consider holding off on refinancing your student loans.
“Every lender has to check credit again, just before settlement,” said Pederson. “If we see any new inquiries or loans, this new information has to be researched and can cause the file to go back into processing and underwriting.”
Applying to refinance your student loans while your mortgage is pending could put your home purchase at risk.
A mortgage could impact your chance to refinance student loans
Depending on the situation, your mortgage could impact your ability to refinance your student loans. A high debt-to-income ratio could result in a rejected refinancing application. Your mortgage adds to your debts. If your income isn’t high enough to absorb that debt and provide a buffer, it could cause problems for your student loan refinance.
As long as you make your mortgage payments on time and you already have a high enough income and qualifying DTI, a home loan shouldn’t hinder you from getting a student loan refinance.
In fact, after a few months of on-time mortgage payments, you should see an improvement in your credit score.
Student loan refinancing and buying a home
Whether you should refinance your student loans before or after you buy a home depends on your goals and individual situation. The biggest impact comes from whether or not your debt-to-income ratio due to student loans is holding you back from qualifying for a mortgage.
If that is the case, refinancing might lower your monthly payments enough to allow you to qualify for your home.