How Student Debt Impacts Your Chance at Buying a Home
WHAT YOU'LL LEARN
Can you buy a home with student debt?
Can you buy a home as soon as you graduate?
How do student loans affect your credit score?
WHAT YOU'LL LEARN
Can you buy a home with student debt?
Can you buy a home as soon as you graduate?
How do student loans affect your credit score?
Have you been thinking about taking the leap into homeownership? Like many first-time homebuyers, you might be asking yourself how student loan debt affects your chances of buying a house. Getting approved for a mortgage is based on three main factors – your down payment, your credit score, and your household income relative to your household debt. There may be other factors depending on the type of loan you apply for, but having a student loan doesn’t have to impact your ability to buy a home negatively.
Can You Buy a Home as Soon as You Graduate?
After graduating, being placed on a short-term deferment by your student loan company is a common next step, giving you time to get a job before paying back the debt. Because you’re not actively paying off the debt, you may forget to include that future payment in your current budget and think you have more money to spend on a house. So, don’t forget about this and start pre-planning your future expenses to give yourself a clearer picture of what you can afford when you’re ready to buy, even with student debt.
How Much Impact Does Your Student Debt Have on Buying a Home?
When you apply for a mortgage, your lender hones in on something called debt-to-income (DTI)The percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk.debt-to-income (DTI)The percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk.; this is done by dividing all of your debts by your gross income (total income before taxes and other deductions). The Federal Housing Administration (FHA) requires that the anticipated monthly student loan payment, or 1% of your outstanding student debt balance (if you don’t know your anticipated monthly payment), is included as part of the DTI ratio – even if the school loan is in deferment.
In addition, Fannie Mae allows for the monthly payment shown on your credit report to be used in the calculation of DTI.
So, if someone else is paying for your student loans, like a parent, this would be excluded from your total debts — ultimately lowering your debt-to-income.
And it’s especially good news if you have an income-based reduction plan because, for many homebuyers, this amount might be lower than calculating 1% of your outstanding student loan balance.
Expert Tip
Generally, your debt-to-income ratio (DTI) should be 43% or less to get a mortgage approved, but it can differ from lender to lender and loan to loan.
So, Can You Buy if You Have Student Debt?
If you’re currently paying off school loans or will have to pay them off in the future, getting a mortgage is still possible as long as your debts don’t exceed 43% of your income. It’s also important to factor in other expenses, like food or utility bills, to get a clearer picture of how frugal you will have to be while owning a home. If you can afford having the debt and all your other expenses while paying a mortgage comfortably, then you’re in a much better position than you may have initially thought.
How Do Student Loans Affect Your Credit Score?
If you’re paying on your student loan balance, a report is sent to the major credit agencies. Therefore, it’s crucial that you’re on top of your payments and never miss a due date. But, if you’re in a deferment period, your credit score will not be affected.
Expert Tip
Lenders have minimum credit score requirements for loan approvals, so consider your student loan as an opportunity to show that you’re capable of paying off a large debt.
If you have good credit with student loan debt and your total debts stay around that 43% mark, then you’re in a good position for getting a mortgage. If you don’t have good credit and have student loans, then work on improving that score by paying off your loans consistently. You can also work with Atlantic Bay on improving your credit score to ensure you’re on the path to homeownership.
How Does a Down Payment Play into Buying a House with Student Loans?
Your down payment is a percentage of the home price you plan on providing to either satisfy the mortgage program requirements or to keep your loan amount manageable. Some loans require at least 3% down, and some may require as much as 20% down, if you want to avoid mortgage insurance premiumsAn insurance policy that protects the lender in case you default on your loan. Mortgage insurance is required for FHA loans and for Conventional loans when you put down less than 20%.mortgage insurance premiumsAn insurance policy that protects the lender in case you default on your loan. Mortgage insurance is required for FHA loans and for Conventional loans when you put down less than 20%..
If you’re able to save the right amount on a home and all other criteria mentioned above are met, you have a good chance of getting a mortgage, even with student debt.
If you don’t have enough saved up, there are grants and down payment assistance programs available, and our team can walk you through those, which typically have income limits and other qualifying criteria.
Ready to Buy?
If you’re someone who is paying off student loans and interested in buying a home, make sure to have a down payment, unless you’re eligible for government-insured loans (such as the VA loan). Also, check that your credit score is in good standing and that your DTI doesn’t exceed the 43% ratio. Budgeting and pre-planning are huge aspects of the homebuying process. The good news is that it’s possible to have a home while paying for student debt, if you keep a close eye on your budget and focus on the big picture.