Do Student Loans Affect Buying a House and Getting a Mortgage?

Student loans are one of the most confusing financial products out there. You’ve probably heard the horror stories about struggling to pay off your debt, or about being sued when you default. But have you ever wondered whether student loans are actually tied to buying a home?

You probably know that student loans have a huge effect on your ability to buy a house or get a mortgage. In fact, the average student loan debt is about $29,950, and about 36 percent of student loan borrowers are behind on payments, according to a report from the Institute for College Access & Success.

Do student loans affect the purchase of a home? These days, many middle-aged millennials think this way. In the CNBC Harris survey, conducted in 2021 among millennials ages 33 to 40, about one in six of those who are not yet homeowners said they think their student debt is affecting their ability to make a purchase.

And since many college graduates have more student debt than they earn in a year, it makes sense that they would see their student loans as a major barrier to homeownership. But what impact do student loans have on buying a home? And are there any special mortgage rules that apply specifically to homebuyers with student debt? Let’s look at all the details of student loans and mortgages.

Do student loans have an impact on buying a home?

While you need to have a good credit history to get a mortgage and get the best interest rates, that’s not the only factor mortgage lenders take into account. Another important factor is your debt-to-income ratio (DTI). In fact, there is more than one type of ITD. Lenders usually take into account both your first ITD and your second ITD.

Edge factor DTI

Your initial ITD is determined by dividing your estimated monthly mortgage payment and homeowner expenses (mortgage, property taxes, mortgage insurance, homeowners insurance, etc.) by your gross monthly income. For example, if your monthly income is $2,000 and the lender assumes that your monthly expenses for the purchase of the house are $500, your ITD will be 25%. To qualify for a conventional loan, your initial DTI must generally be less than 28%. Technically, your student loans do not affect your first payment. However, you should keep the front ratio as low as possible. A low DTI at stage one can help you get a mortgage if you have a high DTI at stage two.

DTI coefficient on rear side

While your ITD in Step 1 only takes into account your housing expenses, your ITD in Step 2 takes into account all your outstanding debts. This means that your student debt will be included in the calculation of the ITD. And that’s where student loans and mortgages don’t always go together. To determine your ITD, divide your monthly debt payments by your gross monthly income.

DTI limits in reverse

To get a mortgage, you generally need to have a front-end ratio of 28% or less and a back-end ratio of 36% or less (known as the 28/36 ratio). However, some loans allow for higher limits:

  • Conventional loans are generally 28/36.
  • The Federal Housing Administration (FHA) limits are currently 31/43, but may be higher under certain circumstances.
  • The U.S. Department of Veterans Affairs (VA) limits are calculated with a DTI of only 41.
  • The USDA limits are 29/41.

While these programs can help you exceed the typical DAI limit of 36%, you have fewer options if your DAI is 43% or higher. This is the maximum DTI you can have and still qualify for a qualified mortgage.

How student loans affect the DTI value

Let’s say you apply for a mortgage and your monthly income is $4,000. Suppose your housing costs are $1,000 per month, your car costs are $300 per month, and your monthly student loan payment is $700. Here’s what the calculations would look like: 1,000+300+700= $2,000 (total debt) 2,000/$4,000 = 50% ITD on reverse side Clearly, this DTI score is quite high and makes you unsuitable for a mortgage in most cases. But look how things would change if your monthly student loan payment was only $350 a month.

1,000+300+350= $1,650 (total debt) 1,650/$4,000 = 41% of RTI reversed This type of DTI will still be a bit high for a conventional loan, but may qualify you for an FHA loan. And if you decide to buy a slightly less expensive home, you can still lower your ITD. This example demonstrates the importance of reducing student loans in obtaining a mortgage. Ask me about your student loans

To improve the DTI ratio for the background

If you have significant student loan debt, the previous paragraph may be a concern. Take it easy. There are many strategies that can help you lower your ITD. Here are some options.

1. Increase in capital expenditure

If your debt-to-income ratio is an issue, you may want to delay purchasing a home to make a larger down payment. The more you pay upfront, the lower your DTI ratio will be. Yes, many support programs for first-time home buyers require a small down payment. In addition, many states have installment assistance programs. But when it comes to bringing your ITD within an acceptable range, a small down payment can actually be counterproductive.

2. Conversion to income-based repayment (IDR)

If all or most of your student loans are federal loans, consider enrolling in an income-driven repayment plan (IDR). It is true that IDR plans do not change the amount you owe. And in fact, you often pay more interest on these plans. What they can change, however, is your monthly payment. And that’s the key to getting a mortgage – making sure your monthly obligations are within an acceptable range. An IDR redemption plan, such as Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE), can help.

3. Refinancing your student loans

Depending on how much you need to save on your student loan, refinancing to a loan with a lower interest rate may help you do so. This is not the best option if you have a government social loan (GSL) or a very low income. But if your income is high (making income-contingent plans less useful) and you’re not working on a PSLF, refinancing can not only help you pay less on your student loans, but also potentially help you qualify for a mortgage. Use our free calculator to see how much you can save by refinancing.

How Fannie Mae’s new student loan guidelines can help

In April 2017, Fannie Mae introduced new monthly debt guidelines specifically designed to help people with high student loan balances qualify for a home loan. How will student loans affect buying a home under the new rules? Here’s what you need to know about Fannie Mae’s DTI guidelines for student loan borrowers and how to get the most out of them.

1. Debts paid by others

If you have debts – whether student loans, credit cards or car loans – that someone else (your parents, for example) pays off, they no longer count towards your debt-to-income ratio. However, this new rule does not apply to mortgage debts.

2. Calculation of the payment of the study debt

With this change, lenders can now accept student loan payment information as it appears on credit reports (as opposed to the old rule that 1% of the outstanding balance must be a loan payment). This can be incredibly useful for student loan borrowers who use income-based repayment plans. Often the monthly payments in IDR plans are much lower than the normal repayment rate. For example, a typical monthly repayment is $700 per month, whereas with an IDR plan, you only have to pay $50 per month.

According to these guidelines, in this scenario, only $50 of student debt would count towards your ITD. Incredibly, this even applies to $0 payments, provided you can provide documentation from your credit card servicing institution showing that $0 payments will continue. If your IDR plan currently assumes a $0 payment, your student loans do not count toward your ITD at all.

3. Deferred student loans

Unfortunately, if you are trying to buy a home with a student loan deferment, you cannot exclude your student loan repayments from your ITD. In other words, you can’t say your payment is invalid, even if it technically is. Instead, the lender must set the amount payable at 1% of the outstanding balance or the payment you would have made under an ordinary repayment plan.

While it may seem inconvenient, this rule was put in place to protect consumers from predatory lenders who will give you credit you can’t afford. If your student loans are currently in deferment, you are probably in financial difficulty and it is best to refrain from taking out a mortgage until your situation improves.

How compensating factors can help

If you still fear that paying off your student loan will make your DTI ratio too high, you still have options. First, you can try to find a lender that offers non-conforming loans. However, these products are generally more expensive. If you are trying to qualify for a government mortgage product, such as an FHA loan, your lender may disregard the debt-to-income ratio if you have compensating factors.

Taking these factors into account, the maximum DTI ratios for FHA loans increase to 46.9%/56.9%. There are several factors that the FHA allows lenders to consider. But one of them, from which everyone can benefit, is the balancing factor of controlled cash reserves. Saving enough money to make at least three mortgage payments can help you get a loan. In fact, up to 60% of your retirement account can be taken into account.

Another imputation factor that may apply to you is the Significant Extra Income factor, which is not taken into account in your actual gross income. You may qualify for this exemption if you have significant income (for example, part-time income, overtime, or bonuses) that is not included in your actual gross income.

Is a mortgage with high student loans a good solution?

So we have seen that there are many options that can help you get a home loan even with a high DTI. But is it worth it? Or will a mortgage commitment add too much stress and financial risk to your life? The goal of most people is to have no mortgage at all. But if you want to own your own home, you absolutely must start with a mortgage.

Credible is a one-stop shop for comparing mortgage options. You can seek expert advice. Student Loan Planner® advisors have helped thousands of borrowers make smart financial decisions. Sign up today for student loan advice. A plan for a student loan Refinance your student loan and receive a bonus in 2021.

Frequently Asked Questions

Do student loans affect mortgage approval?

Loan payments from student loans have become an unavoidable part of the modern student’s life. The amount of debt incurred by students is not just a financial burden, but a huge obstacle for many student borrowers. Studies have shown that student borrowers who have debt in excess of $30,000 are less likely to buy a house than those with less debt. However, there is no guarantee that those with less debt will ultimately be able to buy a home.

This is often due to the fact that purchasing a house comes with a significant amount of debt. It is an unfortunate fact that many young adults take out student loans to fund their college education. This is a big financial decision arguably, since student loans are a form of debt. Let’s face it, student loans are not a very popular topic in a lot of households. People generally don’t like to talk about them, but it is a fact of life that most people will end up having to deal with.

Will student loans prevent me from buying a house?

The United States government has a strong influence on college students’ financial lives. They give us money and then take it away again. But what are the consequences of student loans? We asked Joanna Smith. It’s not easy to buy a home, especially a bigger one. Buying a house is a big investment and you can’t do it without getting a loan. Instead of getting a traditional bank loan, many people are now opting to get a student loan.

Despite the fact that student loans aren’t supposed to be used for buying a house, many people are getting them to buy a house. What are some of the problems with student loans and how can you avoid getting one?

Do student loans affect first time home buyers?

Like other types of debt, student loans can have a huge impact on your finances. If you’re just starting your adult life, or thinking about buying your first home, sometimes student loans can be a huge pain. When you’re paying off student loans, you may have to move out of your parents’ house, delay some purchases, and not be able to afford all that nice furniture for your new home. Student debt is becoming a large problem for many households.

The average student currently graduates with nearly $25,000 in debt, and a recent survey showed that the median student loan debt for a college graduate is over $30,000. What does this mean for prospective buyers who are looking to buy a home? The answer is: it depends. Student debt can be a factor if the homeowner is looking to make their first home purchase, but not if the homeowner is planning on buying a home for investment purposes. If a prospective homebuyer is at all concerned with their student loan debt, they should speak with their loan servicing company and ask about options for lowering the amount they owe.


About the Author: Prateek

You May Also Like

Leave a Reply

Your email address will not be published. Required fields are marked *