How Do Student Loans Affect Buying A House?

As you’re preparing to buy a home, it’s important to get your finances in order to ensure you’ll be approved for a mortgage and will be able to afford your loan payments. For many young (and not so young) borrowers, that means figuring out how their student loans fit into the picture.

As of December 2022, Americans hold more than $1.7 trillion in combined student loan debt across more than 43.8 million borrowers.

There is both good and bad news for those existing student loan debtors wondering how student loans affect buying a house. The good news is that it is absolutely still possible to buy a home with student loans. The bad news is your monthly payments will affect the amount of house you can buy.

Can You Buy A House With Student Loan Debt?

If you’re someone with student loans, you’ll be happy to hear that you don’t need to be completely debt-free to buy a house. However, your loans – specifically, your monthly payment – can affect your ability to qualify for a mortgage.

Even though you can purchase a home with student loan debt, it’s undoubtedly been a hurdle for college grads. Homeownership has declined by 1.8% for each $1,000 of student loan debt over the past 2 decades. Additionally, 60% of millennials who don’t own homes say their student loan debt is delaying their ability to do so.

But if you’re determined to buy a home, don’t let these numbers scare you. We’ll explain how student loans affect buying a house and what you’ll need to have in order to qualify for a mortgage, even with those loans.

How Do Student Loans Affect Mortgages And Buying A House?

There are four different ways that student loans can affect your mortgage and your ability to buy a house. Those factors are:

• Debt-to-income ratio (DTI)
• Credit score
• Savings and down payment
• Mortgage terms

1. Student Loans Can Affect Your Debt-To-Income Ratio

In the eyes of banks and lenders, your debt-to-income ratio (DTI) is one of the most important aspects of your ability to repay a loan. Your DTI is the percentage of your gross income that goes toward debt. It’s calculated by dividing your monthly debt by your income.

The higher your ratio, the more of your money is going toward debt and the more difficult it’s going to be to qualify for a mortgage (especially a large one). On the other hand, a lower DTI will make it easier to buy a home.

Additionally, your DTI will directly affect the amount of money you can borrow. In most cases, your DTI will need to be under 43% to get a qualified mortgage that meets government standards. And most lenders prefer to see a DTI below 36%, as this gives you much more wiggle room in your budget.

2. Student Loans Can Affect Your Credit Score

If you’ve ever taken out a loan or received a credit card in your name, you likely have a credit score. It’s a three-digit number that reflects your payment history and how many accounts you have in good standing.

Lenders use this number to determine the risk associated with giving you a loan. A good credit score and a clean credit report give lenders confidence you’ll repay your loan on time.

Whether you have $1,000 or $100,000 in student loan debt, your balance doesn’t necessarily have a huge impact on your credit score. What will affect your score is making (or not making) your monthly payments on time. And once a missed payment appears on your credit report, it stays there for 7 years, which can affect your ability to borrow for a long time.

If you have trouble remembering to make your payments on time, try setting yourself a reminder on your phone or computer or making your payment due dates on a calendar that you look at every day. Even better would be setting up automatic loan payments so you’re guaranteed to never miss one.

3. Student Loans Can Affect Your Ability To Save For A Down Payment

A down payment is the amount you pay out of pocket to buy a home, usually as a percentage of the purchase price. The down payment shows banks, lenders and home sellers that you’re a serious buyer.

By paying more upfront, you can earn better mortgage terms and increase your chances of getting a purchase offer approved. Most conventional loans with the best rates require that you put down 20%. However, most first-time buyers put down far less – often as little as 3%. And if you put down less, you’ll be on the hook for private mortgage insurance (PMI).

Unfortunately, trying to save for a down payment on a house can be understandably difficult when your student loan payments tie up so much cash each month. Chances are that you aren’t able to save as much each month as you would be able to without student loans.

If you’re set on owning a home, the best thing you can do is to put yourself on a savings plan. Figure out how much you’re able to save each month. Once you know roughly how much of a down payment you’ll need (which you can figure out by determining your home budget), you’ll have a good idea of how long it will take you to save everything you need.

4. Student Loans Can Affect Your Mortgage Terms

Finally, your student loans can affect your mortgage loan terms, especially your interest rate. When determining your interest rate, lenders take many factors into account, including your credit score, DTI, down payment and more.

Generally speaking, the higher your credit score, the better the interest rate and annual percentage rate (APR) you’ll qualify for. Borrowers with a credit score of around 740 or higher can generally qualify for the best scores.

But lenders also take into account your DTI and down payment. If you have an excellent credit score, but a higher DTI and low down payment, you may end up with a slightly higher interest rate than you otherwise would have.

Tips For Buying A House With Student Loan Debt

One of the best things you can do for yourself if you’re planning to buy a home and you have student loan debt is to start preparing early. Taking steps to get your finances in order ahead of time can improve your chances of qualifying for a loan and help you to get better loan terms.

• Research all loan types: There are many types of home loans, and some are better suited to certain credit profiles, incomes, down payment sizes and other factors. You may find that a conventional loan isn’t the best option for you.
• Look into down payment assistance: Many state and local governments or organizations offer down payment assistance grants and loans to help people get over that major hurdle to homeownership.
• Consider first-time home buyer programs: There are many first-time home buyer programs designed to make homeownership more achievable. These programs provide grants, loans and other financial assistance.
• Make a higher down payment: It’s true that the down payment is one of the largest hurdles to buying a home. However, a higher down payment can lower your monthly mortgage payments and lower your loan interest rate.
• Pay down other debts: Yes, you can buy a home with debt. But the less debt you have, the easier it will be. Before buying a home, consider paying off debt other than your student loans, especially high-interest credit card debt.
• Boost your income: Your debt is only one side of the DTI equation. The other side is your income, meaning you can make it easier to buy a home by increasing your income. A higher income will also allow you to save for a down payment more quickly.
• Increase your credit score: Your credit score is one of the most important factors lenders look at when you buy a home. Work on increasing your credit score as much as possible ahead of time to improve your eligibility and potential loan terms.
• Refinance your student loans: If your student loans are eating up too much of your monthly budget or have too high of an interest rate, consider refinancing them. A lower monthly payment can improve your DTI and make it easier to get a mortgage.

Do Student Loans Affect Buying A House? FAQs

Buying a home at all is a major feat, let alone doing it with student loan debt. Here are the answers to some of the most frequently asked questions about how student loans affect buying a house.

Should I pay off student loans before buying a house?

Paying off your student loans before buying a house can improve your chances of getting approved, improve your interest rate and increase the amount you’ll be able to borrow. However, it’s not totally necessary and you can still qualify for a mortgage with student loan debt.

How do student loans affect first-time home buyers?

Student loans can affect first-time home buyers in several different ways. The biggest factors are the way your student loans can affect your debt-to-income ratio, your credit score and your ability to save for a down payment. All of those factors together can affect your mortgage terms.

Does student loan deferment affect mortgage qualification?

Student loans in deferment have the same impact on your mortgage qualification as any other student loan. They’ll still be included in your DTI. If your monthly payment isn’t shown on your credit report, lenders will use 1% of your outstanding balance or a fully amortizing payment using the loan repayment terms.

The Bottom Line

Buying a home is a major financial achievement, but it can be more challenging when you have student loan debt. The good news is your loans don’t necessarily have to hold you back from purchasing a home. If you’re reading to start the home buying process, get approved with Rocket Mortgage^® today.