Can You Buy A House With Student Loan Debt?

The answer is yes, you can buy a house with student loan debt. In fact, many homebuyers are in a similar situation, balancing student loan payments while navigating the homebuying process. Whether you’re looking to buy a condo in New York City or a house in Chicago, your student loans might impact your ability to qualify for a mortgage, but they won’t necessarily prevent you from purchasing a home.

By understanding how lenders evaluate your finances, you can take steps to improve your odds and move toward homeownership.  Let’s dive into the details of how to buy a house with student loan debt and the steps you can take to increase your chances of approval.

Can you get a mortgage with student loan debt? 

Yes, you can get a mortgage with student loan debt. Lenders primarily assess your debt-to-income (DTI) ratio, which compares your monthly debt payments, including student loans, to your gross monthly income. Having student debt doesn’t automatically disqualify you if your DTI is within acceptable limits. Different loan types, such as FHA, VA, and conventional loans, may offer more flexibility, allowing for higher DTI ratios or more lenient requirements. As long as you have a stable income and can manage the DTI ratio with your debts and the new mortgage, you can still qualify for a home loan.

How to buy a house with student loans

If you’re ready to buy a home but still carry student loan debt, here are some practical tips to help you move forward.

1. Improve your credit score

Your credit score is a key factor in determining your loan eligibility, as lenders use it to assess how risky you are as a borrower. A higher credit score increases your chances of loan approval. Here are some tips to help you improve your credit score, especially when you have student loans:

• Set up autopay for your student loans to ensure on-time payments and avoid missing any deadlines.
• Keep your credit card balances under 30% of your credit limit to prevent negatively impacting your credit score.
• Avoid taking on new debt, like car loans, before applying for a mortgage, as this can lower your credit score.
• Check your credit report for errors, particularly with your student loan accounts, and dispute any discrepancies.
• Make on-time payments for both student loans and credit cards to demonstrate financial responsibility.
• Leave unused credit lines open to maintain a healthy credit utilization ratio. Closing them can hurt your score.

2. Manage your debt to income ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly debt payments compared to your gross monthly income. Lenders use this figure to assess your ability to manage monthly payments and determine if you can afford a mortgage. With student loans, your student loan payments count toward your DTI, so managing it is crucial. To increase your chances of loan approval, aim to keep your DTI below 43%. Here are some ways to improve your DTI if you have student loan debt:

• Explore income-driven repayment plans for your student loans to lower your monthly payments and reduce your DTI.
• Pay off smaller debts like credit cards to create more room in your budget for a mortgage payment.
• Increase your income through overtime, a raise, or a side job, as lenders calculate DTI using your gross income.
• Use the debt avalanche or debt snowball methods to pay off debt, starting with high-interest debts (avalanche) or small debts (snowball), depending on what motivates you.

3. Consider mortgage types that work with student loans

When applying for a mortgage with student loan debt, it’s important to consider loan options that work with your financial situation. Different loan types may offer more flexibility, especially if you have student loans. Here are some mortgage options to consider:

• Conventional Mortgages: These are standard loans not backed by the government, but they usually require a higher credit score (620+) and may have stricter DTI limits. However, if your student loan debt is manageable, this could still be an option.
• FHA Loans: If your credit score or down payment is a concern, FHA loans could be a good fit. These government-backed loans have lower credit score requirements (as low as 580) and allow smaller down payments (as low as 3.5%), making it easier to qualify, even with student loans.
• VA Loans: If you’re a veteran or an active-duty service member, VA loans could offer significant advantages. They often require no down payment or private mortgage insurance (PMI), which can be beneficial if you’re managing student loan debt and want to keep costs low.
• USDA Loans: If you’re buying a home in a rural area, USDA loans may be an option. They typically require no down payment and offer lower mortgage rates, making it easier to afford a home while managing your student loan payments.
• Income-driven mortgage options: Some lenders offer programs designed for borrowers with student loans. These options may take your income-driven repayment plan into account, which can reduce your monthly payments and improve your DTI ratio.

4. Refinance your student loans (if possible)

When mortgage lenders assess your debt-to-income (DTI) ratio, they consider the amount of student loan debt, interest rates, and repayment terms. Refinancing your student loans can lower your interest rate, saving you money immediately and in the long run. This can also help you save for a down payment on a home. However, refinancing requires a good credit score and an acceptable DTI. If you qualify, refinancing is a smart move to improve your financial standing before applying for a mortgage.

5. Apply for pre-approval on a mortgage 

Pre-approval is a crucial step before house hunting, especially if you have student loans. It shows sellers you’re serious and helps you understand how much you can borrow based on your income, credit history, assets, and debt-to-income ratio (DTI), which includes your student loan payments. With this information, you’ll get a clearer picture of what you can afford, helping you focus on homes within your budget. 

Additionally, pre-approval can give you an advantage in a competitive market, as it shows sellers you’re financially ready and increases the likelihood of your offer being accepted. It also helps you avoid wasting time on homes that are out of your financial reach.

6. Consider down payment assistance programs 

Saving for a down payment can be a major hurdle, especially when you’re juggling significant student loan debt. Fortunately, there are various down payment assistance programs designed to help ease this burden. These include federal loan programs, first-time homebuyer programs, and state-specific grants. These programs can help with down payments, reduce interest rates, and even cover closing costs, making homeownership more achievable.

7. Apply with a co-borrower

Adding a co-borrower to your mortgage application can help lower your debt-to-income (DTI) ratio, making it easier to qualify for a loan. By combining both incomes, lenders will consider a higher total income, which can offset existing debt, including student loans, improving your chances of securing a mortgage. A co-borrower also shares responsibility for the loan, so if they have a stronger financial profile, such as a higher income or better credit score, it can significantly strengthen your application. However, it’s important to choose a co-borrower you trust, as both parties will be equally responsible for repaying the loan.

8. Buy a starter home

Opting for a starter home can be a smart move if you’re working with student loan debt. Lenders may be more flexible with eligibility requirements for smaller, more affordable homes. By choosing a starter home, you can make a larger down payment, which helps lower your monthly mortgage payment. This approach allows you to stay within a reasonable budget while still achieving homeownership, leaving room for future upgrades as your financial situation improves.

Should you pay off your student loans before you buy a house?

Deciding whether to pay off your student loans before buying a house depends on your financial situation. If your debt-to-income (DTI) ratio is high, paying down your student loans can improve your chances of mortgage approval. However, if you’re financially stable and can manage both debts, you don’t need to wait. Consider your savings, credit score, and ability to afford monthly payments. Refinancing your loans or increasing your income can also help without delaying homeownership.

Calculate your DTI

Before deciding whether to buy a home, calculate your debt-to-income (DTI) ratio. This ratio helps lenders determine how much of your income goes toward debt payments. To calculate it, add up all your monthly debt payments (including student loans) and divide that total by your gross monthly income. If your DTI is above 43%, it may be harder to qualify for a mortgage, so consider reducing your debt or increasing your income to improve your chances.

Here’s an example to help guide you through calculating your debt-to-income (DTI) ratio:

1. Total monthly debt payments:
   • Student loan payment: $300
   • Credit card payments: $150
   • Car payment: $200
   • Total debt payments = $650
2. Gross monthly income:
   • Income = $4,000
3. DTI calculation:
   • DTI = ($650 / $4,000) * 100 = 16.25%

In this example, the DTI ratio is 16.25%, which is well within most lenders’ acceptable range. If your DTI is higher, you’ll need to work on reducing your debt or increasing your income to improve your chances of mortgage approval.

Evaluate your savings

In addition to your DTI, evaluate your savings to ensure you’re financially prepared for homeownership. You’ll need enough money for a down payment, closing costs, and an emergency fund. If your savings are low, it might make sense to wait until you’ve built up a sufficient cushion before buying a home. This will help ensure that you can comfortably manage both your student loan payments and new mortgage payments.

Revisit the terms of your student loans

Take time to review your student loan terms, especially the interest rates and repayment plans. High-interest loans can be more burdensome, so consider refinancing or consolidating to lower your rate. If you’re on an income-driven repayment plan, understand how it might affect your DTI when applying for a mortgage. The goal is to ensure that your student loans won’t put a strain on your finances as you move forward with homeownership.