Buying a House With Student Loan Debt: Here’s How to Do It

buying a house with student loan debt

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 percent of college-educated Americans with student loans have postponed buying a home because of their debt.

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 percent.
    Ideally, you want to manage your credit utilization so you aren’t using more than 30 percent of your available credit.
  • 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.

It’s also important to check your credit report before buying a home. (Request a free annual credit report here.) Make sure your report is accurate and up-to-date.

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 percent of your gross monthly income on total housing expenses, and no more than 36 percent 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, too 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.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

Published in Buying a House, Financial Tips

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  • Komrad

    I was looking more for ‘should I buy, or should I pay off the loan first?’ Type of article . Have you written one?

    • We haven’t covered that topic specifically yet, but it’s a great idea so I think we will very soon. Thanks!

      • Thanks. I put off buying a home as I moved about once a year as a contractor switching employers , but now I’m stable so this has become a decision I need to make. Continue to rent until all debts are paid off, or buy a home first and then focus on becoming debt free ?

  • It’s not an easy question to answer. But in case you’re curious, we recently published this article to help: https://studentloanhero.com/featured/should-buy-house-when-you-have-student-loan-debt/

  • Jessy

    This doesn’t really give any advice that is specific to student loans and is more or less “how to buy a house” These are all things I have done but since I am on income driven payment plan AND currently a student while also working- the loan officer wants to know what I WILL pay and often times they want to know for multiple years what your payment will be since it is listed on credit report as 0.– How do we handle this? It is important that we discuss the challenges unique to student loans and not the standard “how to get a mortgage” items. Additionally I have heard of many lenders that do not recognize IBR plans etc and instead use the regular payment… but no one is addressing this… it is almost like a punishment for those who are in any plan other than standard.

  • copper12

    This is dangerously bad advice as of 2016. Lenders cannot use the income-based repayment amount to calculate DTI anymore, but must use a fully-amortized payment (meaning, if you were paying that rate, your loan would be paid off in full at the end of the term), regardless of what you are actually paying. If you cannot provide documentation to prove what the fully-amortized payment would be, they must use 1% or 2%, depending on the type of mortgage, of the total loan amount. So no, applying for an income-based repayment plan will not improve your chances of getting a mortgage, and in fact will make things worse on you by allowing the loan to accumulate interest at a faster rate than you are paying it off. Instead, you should get a letter from your loan servicer documenting what your fully-amortized payment would be (which may be higher than what you are paying, but is still probably lower than 1-2% of the total).

    • Hi,

      Thanks for your comment. I’m working on updating the article to make it more accurate. However, I haven’t been able to verify everything you’ve written.

      My understanding is FHA loan applicants can still use income-based repayment amounts to calculate DTI as long as they don’t have a $0 payment.

      If they have a $0 payment or are in deferment, they must use the 2 percent amount.

      For USDA mortgages, it’s 1 percent.

      For traditional mortgages, it’s the greater of 1 percent or the actual payment.

      If this still sounds incorrect to you, could you please provide a references to what you’re reading?

      Thanks,

      Jeffrey
      Student Loan Hero

      • shauna marofsky

        I read these sites that all say you cant do this anymore and it is not true. I have an income based repayment with a zero payment and i was approved for a loan today. I dont know about all types of loans but I applied for a fha. It clearly states on the HUD page that this is acceptable.

        • Cheryl Gatling

          Please tell me who can help me

      • Cheryl Gatling

        What about forbearance. Is that better?

      • jhatton

        http://portal.hud.gov/hudportal/documents/huddoc?id=16-08ml.pdf

        FHA will absolutely not use an IBR payment

        Student Loans (II.A.4.b.iv.(H) (TOTAL) and II.A.5.a.iv.(G) (Manual)) (1) Definition

        Student Loan refers to liabilities incurred for educational purposes.

        (2) Standard

        The Mortgagee must include all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments.

        (3) Required Documentation

        If the payment used for the monthly obligation is:

         less than 1 percent of the outstanding balance reported on the

        Borrower’s credit report, and

         less than the monthly payment reported on the Borrower’s credit

        report;

        the Mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor.

        (4) Calculation of Monthly Obligation

        Regardless of the payment status, the Mortgagee must use either:

         the greater of:

        o 1 percent of the outstanding balance on the loan; or

        o the monthly payment reported on the Borrower’s credit report; or  the actual documented payment, provided the payment will fully

        amortize the loan over its term.

      • Ana

        Copper12’s comment about lenders not being able to use the income based repayment to calculate DTI is true. I applied for a mortgage a couple of months ago and was denied an FHA loan for the reason that they looked at 2% of my student loan total. I owed $150,000 so definitely didn’t qualify. My lender would not write an amortization letter for me stating that because of the daily interest they wouldn’t be able to do that. It didn’t matter to FHA that I paid my student loans on time and on a loan forgiveness plan. My credit, income, and debts were also not an issue; just the student loans.

      • jamesduren

        It’s 1% or your balance or your actual payments. Says it in the regulations. This is why IBR borrowers get screwed out of mortgages from most lenders. The ones who do offer loans to IBR borrowers are being backed by investors.

  • Matthew Trent

    What this does not discuss is the convoluted public policy in place that actually hurts student/homeowners such as myself. I have at least 18 months of school left, two children [ages 1 and 2], married. Work 3 jobs, make great money. Have best insurance money can buy for entire family paid 100% through my job [this should be factored, as it eliminates any unforeseen medical occurrence]. I have tried to refinance my home with three banks – my current LTV is 58% on a FHA loan. My DTI is 30%; however, the banks are adding 2% of my total student loan debt to my DTI, making it unreachable- a whopping 74% DTI. Our goal is to refinance our home, eliminating high interest debt [only $30k] which keeps our home around 80% LTV. It would lower our monthly out-of-pocket expenses by $850 per month, allowing us to develop a financial strategy to pay for my Ph.D. loans in about 18 months. However, policy is hurting us- there is no way we can get ahead if we cannot get out of high-interest credit card debt- the only other loans we have are two vehicles. Credit is great. This will last our entire lives. But I am sure the Bank CEOs are doing great. We filed for Hardship with Bank of America back in 2010; completed a very stressful re-mod in 2012- now paying current. Even our credit union denied us, due to DTI. Guess this is the new American Dream. Live paycheck to paycheck, even if you have the means [equity] to advance financial strategy in your own home. I guarantee if we would have chose to foreclose during the housing bust and file for bankruptcy, we would have been better off, as almost seven years have passed. Guess doing the right thing and owning up to your agreement[debt] is not in its previous state of normalcy anymore. Oh well.

  • Anna Watson

    Who did you use? I just got denied due to student loans.

  • Hi Cheryl,

    I don’t believe going into forbearance on your loans would help in this case as your DTI will still be calculated based on your total balance. Forbearance is likely treated the same as deferment.

    Cheers,

    Jeffrey

  • Jennie Moyett

    how did you do it? I was not approved because I am on the Income-driven and have $0 payment. Three banks did not approved so how did you do it? I applied for the fha. Help please? my scores are great and great salary so help please

  • Mic

    What is a close estimate on your loan balance? Do you simply not have very much in student loans?

  • Sharlene Shupe-Bryant

    I have student loans that are in a IBR and I am trying to get a house mortgage and they tell me the my DTI is too high and I want to know how to get that lowered or figure out some way to get a house financed. The school that I went to got sued and I’m stuck with this huge debt and also I have a AS degree in Criminal Investigations that I can’t even use. The school lied to me about even getting a job on the police force and they didn’t tell me that their was an age cape and they didn’t even help me find a job after I graduated. So now I can’t get a house for my family because of these student loans can someone please help me get rid of this big debt so I can get a house that is safe for my family.

  • THenextcoming..

    I make 62k a year wife makes 35k, my credit score is 708 and hers is 796, we have around 49k in savings looking to only put down 15k for a home..i still have student loan debt 27k car loan 14k she as 10k student loan debt and 3k credit scores, how do we look, can we afford a 230K home?

  • Hi,

    Thanks for your question. I’m not a mortgage effort, so it’s impossible for me to say. I’d recommend talking with someone who knows more about home mortgages. You can also check out tools like this:

    https://www.zillow.com/mortgage-calculator/house-affordability/

    If there’s anything else I can help with, let me know.

    Best,

    Jeffrey

  • YoungGuy

    Not sure this article is really relevant for student loan holders. The only mention of how this pertains to having student loans is the advice to consolidate or refinance your loans to achieve a lower DTI, but even both of those strategies have potential drawbacks (longer payment period, higher interest rate, etc).

    To be fair, not sure there is anything anyone could write that would be truly insightful on this topic. It’s also how I feel about every single topic ever written about student loans. It boils down to earn more income, pay off high interest or low balance loans first, eat ramen, delay life decisions, move in with your parents, refinance, consolidate, and look into IBR.

    Perhaps Student Loan Hero should be more activist and get legislation on the books to make home buying affordable for student loan holders. Then, communicate with us whom to email to get it passed. Maybe we need to get some type of legislation passed where DTI can be extended to something higher than 43% to accommodate for student loans, or something akin to MIP for an FHA loan can be paid into to incentivize banks to lend to student loan holders with riskier profiles (and maybe can be backed by Sallie Mae using all that interest earned off the loans in the first place).

  • tammy

    hi my daughter has student loans and wants to buy a house they told her she needs to get her student loans off of her credit how can she do that even if she woud take out a personal loan and consolidate them wont that show up on her credit report also

    • ccarr4

      They told me the same thing and told me that if I could get them into deferment for over a year, they would not count them. So I did that and now (a month later) they can’t count deferments as 0, they have to look at the whole amount and take a percentage. Sucks, I will never be able to get a house unless I win the lottery, marry rich, or get a dream job making 6 figures working as a teacher.

  • Renee Sawyer

    I’m about to graduate from grad school. My loans about to come off of deferment will that amount be add to my credit or it only hits once since the loan has already hit my credit when I applied for student loans. I want to get a car soon but my loans will not be on deferment

  • Ana

    Aloha. I didn’t have the luxury of living with my parents after high school. Basically got an apartment, worked full-time, got pregnant, divorced, while dealing with the high cost of living in Hawaii. All my life I was told to get a college degree. And I did; Masters Degree in fact. But despite my $55,000 annual income, and paying on IBR plan in student loans it’s still not enough to qualify for a mortgage with FHA. My credit is fine, my debts are fine, and make my student loan payments on time, but they look at the total amount I owe on student loans which makes me ineligible. It almost pays not to get a degree and just collect welfare.

    • ccarr4

      This is the same boat I am in. I’m looking to buy a home so my monthly payment is less than what i pay in rent now. All but 4 of my student loans are in deferment for well over a year (which is what they told me they had to be a month ago), now things have changed and they have to go by what my payments would be, not even with the IBR or other programs I was ans am in. There is absolutely no way to win for us. Was college really worth it?

  • James L Johnson

    So what is the option for peope who have defaulted student loans. I heard you can still purchase a home, but you aren’t eligible for an FHA, loan. How would a conventional loan work, if you are making some payments on your loans?

  • Veteran Educator

    This doesn’t address new federal guidelines that calculate student loan monthly debt as 2% of total as opposed to actual monthly payment. My wife is a lawyer and I’m a professor and we have great credit. We can’t get a mortgage because of our student loans even though their due to be forgiven in 8 years.

  • dgldm

    This is not a proper article for buying a home. Mortgage companies will take 1% or a fixed monthly income, but they are not accepting IBR payments. Whoever created this rule or policy was clearly clueless on the guidelines for paying back student loans. This policy has allowed mortgage companies to decide what you will pay as a monthly payment as a student even if your loans are deferred for 12 months or longer. Sadly, this article does not address the impact that student loans will have on getting a mortgage. You will need no debt, only student loans and depending upon the amount of your student loans, a large income to buy a basic home. The policy about including deferred student loans as debt is not realistic or present a real picture of someone’s debt ratio. I am going through this now, so this article is very misleading, if you have student loan debt, it will have to be really low to get a mortgage.

  • dgldm

    We are being declined because they will not accept the IBR payment.

    • audrey johnson

      so am i. i was declined today.

    • audrey johnson

      so am i. i was declined today.

  • This was a nice overview of options.

    I think buying a house is getting less realistic for most gradutes due to debt burdens.

    lol the whole point of going to college was to be able to afford a house, not paying off questionable loans.

  • This was a nice overview of options.

    I think buying a house is getting less realistic for most gradutes due to debt burdens.

    lol the whole point of going to college was to be able to afford a house, not paying off questionable loans.

  • bluedye33139

    The brick wall I’ve run into is:

    Lenders no longer look at the actual student loan monthly payment. Rather, they must use a formula that assumes 1% of the total loan as a monthly payment. With $150,000 in student loans, the formula uses $1500/mo. as my loan payment, rather than the income-based payment that I actually make.

    Long story short, no loan. I’m still struggling with the finality of this problem.

    • ggfb20

      Same problem here. It’s like I’m being penalized for being a college graduate, go figure. I make good money and actually pay more for renting a house than I would for a mortgage on the same house. This needs to change, and fast. Who is fighting this battle on a large scale?

    • Andrea L. Means

      I have just run into this problem…and I’m already a homeowner…apparently there was some new rule back last year…it really sucks.

    • Natasha Woods

      I just ran into this problem yesterday. So…… upsetting!!!!

  • Andrea L. Means

    I just applied today and was denied.