Can You Buy A Home With Student Loan Debt?

Certified Mortgage Advisor
NMLS 1701021
Published 
August 18, 2021

Let's answer the question: buying a home with student loan debt?

Can we buy a home with student loan debt? Before I get into anything else, short answer. Yes, absolutely. You can buy a home with student loan debt. There are so many articles and videos out there where I see people talking about this situation.

So you're out of college and now you want to buy a home. What I think, you know, I think is kind of funny because most of the people that I talk to, whether they're 20 or 40 to 60 have student loan debt.

Student loan as a huge problem in America

Student loan debt is a huge problem in America right now. So if you are struggling with student loan debt and it feels like it's overwhelming, and those payments are high, you're not alone. I don't want you to feel embarrassed about it because a lot of people are going through the same problem and they're wanting to move forward with their life.

They got this debt already. They're wanting to move forward, have success in their careers, move forward with buying a home and the rest of the plans that they have for their life. But it seems like the student loan debt can kind of be this ominous presence that's taking over everything else.

So what we're going to do is talk a little bit about student loan debt, how it affects your mortgage, some things to consider, and some creative solutions that you have if student loan debt is kind of holding back just a little bit.

DTI and how it affect your mortgage

So really what we're talking about with student loan debt and why it could be a problem is mainly because mortgages are approved or denied largely based on what's called debt-to-income.

What is DTI?

Debt-to-income ratio just means how much debt are you carrying compared to how much income do you have? And the way that a lender calculates this is they take whatever your minimum monthly debt payments are. So this is not what you pay in debt, but this is what's required by your credit card company or your student loan company, or the auto loan company. What are the minimum monthly payments? Let's add all those. And then divide it by your income. And that will give you a percentage that gives you your debt-to-income ratio.

FHA can be the best option

So most lenders on something like a conventional loan, want that to be lower than 49%, and on an FHA loan, want it to be lower than 56%. So right off the bat that can tell you, that FHA loans might be a little bit more helpful on the side. If you have a lot of student loan debt because they allow you to carry more debt on them monthly.

So mainly what's being looked at is your debt-to-income ratio. So when student loans become tricky is when your minimum monthly payment is a little bit high. When your minimum monthly payment is a little bit high, then it can cause you to not be able to afford as much house because you're going to be taken up with the obligation to pay back your student loan. So that's part of the tricky part.

Challenges if your student loan don't have monthly payments yet

But then what becomes, even more, difficult than that is when your student loans don't have payments yet. So for instance, if your student loan payment is deferred until a future date or it's in forbearance, then your credit report, isn't going to have a minimum monthly. Or if you're on something like income-based repayment, then your minimum monthly payment might be lower.

So the problem that we face there is not that you don't have to make a payment or you have lower payments now it's that the way that a lender calculates it is completely different. So if you have a student loan and your credit report, shows no monthly payment, the lender can't accept zero as a minimum monthly payment. What they'll most likely do is take 1% of your outstanding balance and use that as the monthly payment.

So for most people, this isn't too bad, but if you have a large amount of student debt, for instance, I talked with somebody last week who had about $200,000 in student loans. So they were in a payment scheduled to come due in the next two years. So on their credit report, it showed $0 per month. The problem is when we were qualifying them for buying a home, we had to use 1%. So now we have to act like they have a $2,000 expense per month. Which really cuts into the debt-to-income ratio.

DTI is the main factor for a loan

So that's where it can become a little bit tricky with student loans. Most people don't have balances that are that high. And if you do have balances that are that high, there are some different programs that can help you out. For instance, if you're in the medical field, there are physician loans that ignore medical student loan debt. So some of them can consider there, but your debt-to-income ratio is going to be the main factor here. And considering if you can qualify for a loan.

So, what you can do is take all of your minimum, monthly payments divided by your income and make sure that you can target around that below 49% for conventional or below 56% for FHA.

Credit score

Something else that you'll want to consider is your credit score. So your student loans are always going to be reported on your credit report, which means it impacts your credit score. So make sure that your payments are always on time, and that you're never missing a payment because that's going to bring your credit score down. So much so quickly, so make sure that you're always, either setting up an auto-draft or you have a reminder to make sure that that's paid.

1. Dave Ramsey approach

So let's talk about some solutions. If you're running into problems with qualifying, for a mortgage with student loan debt. Number one is to kind of take a little bit more of the Dave Ramsey approach.

First of all, take a step back, slow down, and then just continue renting and attacking your debt as quickly as you can. That's a great option. That is not a bad option at all. You're going to see a lot of people, especially in the real estate space saying that renting is you throwing away money or paying your landlord's mortgage.

Buying is always better than renting

It's just simply not true. And that is my most unbiased opinion. I make a living when people buy homes. So for me to say, continue renting is the most unbiased advice I could give. Because sometimes it makes more financial sense for you to say continue renting. So you don't have all the added expenses of being a homeowner.

That way you have freed up money to attack debt as quickly as possible and pay down those balances. So when you're ready, you can buy an even better house. You can have an even better financial situation when you buy a house when your debt is taken care of.

Most people, it's not going to be the most favorable option there, but it is an option for you. And it's nothing to be ashamed. There's there's no point in getting a house and having a ton of overwhelming debt. You're not going to be wealthier because you own that late.

2. Having a co-borrower

So another option, and this is really common is to bring on a co-borrower. So bringing on a co-borrower is someone like a family member who would come and sign on a mortgage with you. So what this helps you do is offset some of your debt with their income. And it's a really great way to be able to help you qualify for a home quickly with a spouse or a family member, and then they could get refinanced off the mortgage. And maybe a couple of years when your situation has changed a little bit.

So this is a really common strategy. This might be someone who's living in the home with you, or it might be a family member who is not living in the home with you, but it's a great way to be able to bring your debt-to-income ratio down so you can qualify.

3. Make our debt low

Also, another strategy is to make sure that all your other debt is low. Often when student loan debt is, is tripping up people. When I'm looking at a mortgage application, it's not that the student loan debt is high it's that all of the debt is high. So when I'm looking at someone's mortgage application and I see that they have student loan debt, it might be a small portion of their total debt, but then they also have maybe an auto payment.

They have credit card payments, maybe another loan for something. In that whole picture is what's clogging everything up, not just the student loans. So an option that you have is maybe instead of attacking the student loan debt is one, make sure that you don't continue to use other debt. Don't use credit cards, try to get your car paid off as much as possible, but attack all of your other debt first to get rid of those minimum payments.

That way you can then go back and apply for a mortgage. And the only debt that you have. Just your student loan on there. And usually the student loan debt on its own. Isn't enough to keep you from qualifying. It's usually the whole picture of student loan debt, plus credit card debt, plus auto loan debt. Plus, any other debts that you have there.

4. Pay off high interest unsecured consumer debt

Finally the last strategy, this one's a little bit more creative, but this is for somebody who already owns a home. So if you already have a home, you've been building up equity and paying down your mortgage. Most of the time, what happens is if they own a home and then they're looking at selling and buying another one, sometimes they take whatever they make from the sale and they go put everything down on their new home. It's an option, but it's not the best one.

Normally what I suggest if someone's selling their house and then moving to another one, I like them to take the money from this home and pay off high-interest unsecured consumer debt first, and then make that payment on their new house.

So that's usually the best way to do it. I had a couple move from Arizona to Ohio. They were netting about $60,000 from the sale of their home. And they wanted to take that whole amount and go put it on the new purchase. And I said that's a great strategy. A great thing to do. The only problem is you're going to have a mortgage with a good down payment over here, but you're still going to have $30,000 worth of credit card debt and consumer debt right here, which is still not going to be comfortable. You'll still have to be making that payment at a high-interest rate.

So instead, what I suggested is you have $60,000 that you're receiving take $30,000. Be completely debt-free. Minus your mortgage, then pay the rest of the $30,000 on your down payment. Now you're still putting a nice down payment over. But you got rid of all of those minimum monthly payments, and you got rid of all of this debt and all the interest that's going to be paid here. Then you can take all of your savings from the debts that you were going to pay monthly and put it on the mortgage and be in a better financial position in that way.

Paying student loan using equity

So that's a really great way if you own a home and you're going to sell it and buy a new one, transfer some of that equity into the debt to pay off student loans, or at least take those balances down a good amount before you buy your other.

So really student loans. Aren't a huge problem when you're looking to buy a house.

5. Talk to your mortgage advisor

So a good next step is to talk with a mortgage advisor, to see if they can help you calculate your debt-to-income ratio. So you can get on a good next step to begin purchasing a home. So I love to do this with clients.

I love when they call me. Hey, I might not be ready now, but I want to be ready. Can you help me find the next steps? Can you help me find where I'm at and the next steps I need to take to purchase a home? I love it when people are there because they have realistic expectations and are willing to do the work.

Talk with a loan officer
Copyright © 2021 Win The House You Love LLC. All rights reserved.
Only for educational usage. All calculations should be verified independently. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This is not an offer to lend and should not be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate and/or financial advice. Read the full disclaimer here.