For many consumers, buying a house is a major financial and life milestone. However, student loan debt is preventing some millennials from making home purchases.
According to a Student Loan Hero survey, 41% of college-educated Americans with student loans have postponed buying a home because of their debt.
Get multiple mortgage offers at once
Having student loans won’t keep you from buying a house, although you should be comfortable with the idea of taking on a large amount of debt while still dealing with your student loans. Carefully consider your options, and decide what makes sense for your own financial situation.
Here’s what you need to do when buying a house with student loan debt.
1. Improve your credit score and check your credit report
The most important factor lenders consider when deciding whether or not to lend you money is your credit score. You can maintain a good credit score even if you have student loan debt.
In fact, your student loan debt probably won’t drag down your credit score unless you’ve been missing payments. Here’s how to boost your score ahead of applying for a mortgage:
- Pay your bills on time. This is the most important factor in your credit score. Pay on time and in full, and you can build a solid financial reputation.
- Manage your credit utilization. The ratio of your credit balances to your total available credit lines is your credit utilization. For example, if you have credit lines totaling $3,000 and your credit balances total $1,000, your credit utilization is 30%. Ideally, you want to manage your credit utilization so you’re using as little of your available credit as possible.
- Don’t close old accounts. You might think that closing a credit card account is the way to go when trying to fix your credit score, but this often isn’t the case. An old account, especially if it is in good standing, can help your credit. The longer your credit history and the older the average age of your accounts, the better your credit score.
- Use different types of credit. If you have a “thin file,” there isn’t much for lenders to make judgments about. A mix of revolving credit (like credit cards) and installment loans (like car payments or student loans) show that you can handle different types of debt.
You may have to pay for your credit score, but some credit card companies have started offering free access to a version of your credit score so you can get an idea of where you stand.
If you have suspicious transactions listed on your credit report, you can ask the credit bureau to remove the information. Learn how to dispute a credit report error here.
2. Decrease your debt-to-income (DTI) ratio
As with student loan refinancing, a mortgage lender will calculate your debt-to-income ratio to determine your ability to make monthly payments on the new mortgage.
When buying a house with student loan debt, you need to be aware of the impact your loans have. Many lenders follow what is called the 28/36 qualifying ratio to determine if you’re eligible for the best rates.
This means that you should spend no more than 28% of your gross monthly income on total housing expenses, and no more than 36% on total debt service (including the new mortgage payment).
You can still buy a home if you don’t meet the 28/36 rule, as many lenders will still loan you money if your DTI is high. But you have to decide if you’re really comfortable taking on a loan when you have a high DTI.
Reduce your DTI by paying down some of your debt or by increasing your income. Take a second job, get a side gig, or ask for a raise. Depending on your student loan situation, you might be able to refinance or consolidate your student loans to obtain a lower monthly payment.
Alternatively, you could enroll federal student loans into an income-based repayment program which can lower your monthly student loan payments. This improves your cash flow and can make your home a little more affordable on a monthly basis.
While refinancing or finding a new repayment plan may improve your DTI, it really depends on the type of mortgage you’re applying for.
Some mortgage underwriters base decisions on the percentage of your total student loan balance rather than using your monthly payment amounts under an income-driven repayment plan. If that’s the case, you might need to shop around for a lender if you want to ensure that you are approved for a loan.
3. Pre-approval and your homebuying power
A pre-approval from a lender can help you see what the costs and down payment requirements are. To determine what you qualify for, a lender considers your two-year employment history, credit history, income, and assets.
Here are some important things to keep in mind as you apply for pre-approval when buying a house with student loan debt:
- A lender must look at most aspects of your financial history, at least in the short term. All funds need to be sourced and explained. Any large deposits outside of normal payroll will be closely scrutinized, and any major loans will be considered as well.
- Gifts from family are not unusual for first-time homebuyers. These also need to be sourced and accompanied by a lender’s gift letter. Lenders aren’t supposed to accept loans as down payments, so if a relative is lending you the money for a down payment it’s not going to work. The down payment needs to be a gift, and it should be from someone with whom you have a close relationship.
- Check with the lender to ensure that you’re giving all documents needed for a comprehensive decision on your pre-approval. Some of the documents you need to submit are two years of W-2s, two years of federal tax returns, 30 days’ worth of pay stubs, and two months of asset statements (including bank and retirement account statements).
- If you are self-employed, you might need additional paperwork to verify your income. You could be required to go through an income audit, where an accountant reviews your records and verifies your income.
- More documents may be needed once the loan is underwritten. A lender usually requires tax returns and bank statements.
Once you have your pre-approval, you can use it to help gauge which homes you can afford. Additionally, sellers are likely to take you more seriously once you have a pre-approval in place because they know the bank has already committed to providing you with financing.
4. Consider down payment assistance programs
There are a number of down payment assistance programs that are acceptable to lenders. Many states and cities offer down payment assistance programs, and there are local programs that allow you to use sweat equity if you want to build a new home.
It’s also possible to take advantage of federal loan programs, even if you have student loans. You may qualify for an FHA loan, which would mean a down payment of as little as 3.5%.
If you choose to buy in a more rural area, you might qualify for a USDA loan, which requires no down payment. Don’t forget about VA loans if you have served in the military.
Research your options and speak with a knowledgeable mortgage broker to find out what programs you qualify for at a federal, state, and local level.
Is buying a house with student loan debt right for you?
Before you jump in, make sure you’re actually ready to buy a home. Figure out how comfortable you are with carrying two large debts over long periods of time. Do you feel confident about your income? Is it large enough to comfortably afford a mortgage payment on top of your student loan payments?
Review your priorities. Will buying a home on top of having student loans require you to cut back on your retirement contributions? Will you have to dial back in other areas of your life? Consider what matters most to you, and plan accordingly.
If you have a plan for buying a home, there’s nothing wrong with taking the leap even though you have student loan debt.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|