How student loans can affect your ability to get a mortgage
Getting a mortgage when you have student loans can be tricky, but it's not impossible. It all comes down to how much you're paying each month relative to your income.
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- Having student loans doesn't preclude you from getting a mortgage, but it can make it harder to qualify.
- The main hurdle is your debt-to-income ratio; the more debt you owe, the less mortgage you can afford.
- How your student loan payment impacts your mortgage approval odds depends on the type of mortgage you're getting.
Going to college, using your degree to get a steady job, and becoming a homeowner are all a quintessential part of the American Dream for many. But in recent decades, the "going to college" and "becoming a homeowner" parts of that dream have increasingly been at odds with each other.
And now, as student loan payments are set to resume in October after being paused for over three years, some borrowers may be wondering how their student loans impact their ability to get a mortgage and buy a house.
Can you get a mortgage with student loans?
Plenty of student loan borrowers are also homeowners in spite of having outstanding loans. But whether you'll qualify for a mortgage depends on what your overall financial situation looks like.
"Yes, it is still very possible to get a mortgage even with student loan debt," says Kevin English, chief operating officer at mortgage lender New American Funding. "If you have enough income or assets to support both your student loan payment and a potential mortgage payment, then your student loan won't prohibit you from getting a mortgage."
Being able to afford both a student loan payment and a mortgage payment is the tricky part. In a 2021 poll from the National Association of Realtors, 51% of non-homeowners with student loan debt said that debt is delaying them from buying a home.
How does my student loan affect my ability to get a mortgage?
When you apply for a mortgage, your mortgage lender will look at a few different factors, including:
- Your debt-to-income ratio, or DTI, which shows how much of your monthly income goes toward debt payments
- The size of your down payment
- Your credit score
When it comes to your student loans, the biggest impact they'll have is on your DTI.
"Student loan debt is treated like any other installment debt that a borrower carries," English says. "The payment amount is factored into the overall debt-to-income ratio, which is one of the factors lenders consider when determining your creditworthiness."
You can calculate your DTI by dividing your total monthly debt payments by your gross monthly income. In general, you can't get a mortgage with a DTI above 50%, and the lower your DTI, the better the terms you'll be offered.
The max DTI you can have varies by loan type. Additionally, the type of mortgage you get may determine how your student loan payments are factored into the approval process.
Conforming loans
Conforming loans, the most popular type of mortgage, conform to either Fannie Mae or Freddie Mac guidelines. To qualify for a conforming loan, you can't have a DTI above 50%, though lenders prefer that borrowers have a DTI that's no higher than 36%.
If your monthly payment amount is listed correctly on your credit report, your lender will use that amount when qualifying you for a mortgage. But if you're on an income-driven repayment plan or your loans are deferred or in forbearance, the lender may need to do some additional work to underwrite your loan, depending on which government-sponsored entity is backing your mortgage.
If the mortgage you're applying for is backed by Fannie Mae and you have a $0 monthly payment due to being on an income-driven repayment plan, your lender will verify that your payment is actually $0 and then use that amount when qualifying you.
If you have a loan that is deferred or in forbearance and you're getting a Fannie Mae mortgage, the lender will either calculate what your monthly payment would be based on your loan terms, or calculate a payment equal to 1% of your loan balance.
If you're applying for a Freddie Mac-backed mortgage and your student loan payment is shown as $0 on your credit report, your lender will calculate a payment equal to 0.5% of the loan balance. Otherwise, it will use the amount listed on your credit report.
FHA loans
FHA loans typically have a max DTI of 43%, although in some cases it can be higher.
To qualify a student loan borrower for an FHA mortgage, a mortgage lender will either use the monthly student loan payment shown on your credit report or, if the monthly payment is listed as $0, a payment equal to 0.5% of the student loan balance.
VA loans
VA loans don't have a max DTI, but many lenders like to see a DTI of 41% or less.
How VA mortgage lenders look at your student loan payments depends on the status of those loans. If your student loan will be deferred for at least 12 months after the closing of your mortgage, that loan won't be included in your DTI calculation. Otherwise, your lender will take 5% of your student loan balance and divide that by 12.
For example, if you owe $85,000 in student loan debt, your lender will multiply that by 0.05 to get $4,250. Then it will divide that by 12 to get a monthly payment amount of $354.17.
If the monthly payment listed on your credit report is higher than the number your lender calculates, the lender will automatically use the payment listed on your credit report. If the monthly payment on your credit report is lower than the number the lender calculates, the lender will need to get documentation from your student loan servicer showing the terms and payment information for your loan.
Sounds confusing, but what this essentially means is that if your actual monthly student loan payment is lower than what your lender estimates your monthly payment should be, the lender just needs to get additional confirmation that it's what you actually pay to be able to use the lower payment when calculating your DTI.
USDA loans
If you're getting a USDA loan, you'll generally need a DTI of 41% or lower.
When qualifying student loan borrowers, USDA loan lenders will use the monthly payment shown on your credit report. However, if the monthly student loan payment shows up as $0, the lender will calculate a payment equal to 0.50% of the loan balance.
Mortgage denied due to student loans
If your student loans push your DTI too high, your mortgage application may be denied. But that doesn't mean homeownership is permanently out of reach for you.
What should you do in this situation? First, confirm that your student loans where actually the thing holding you back from an approval. Lenders are required to tell you why you were denied.
If a too-high DTI is indeed the culprit, here are some things you can do.
Apply with more than one lender
Not every mortgage lender has the same requirements for every loan type. For example, while the minimum credit score set by the Federal Housing Administration for FHA loans is 580 in most circumstances, individual lenders are allowed to have stricter standards, such as requiring a minimum score of 600 on their FHA loans.
If your DTI is high due to student loans, it's a good idea to apply with multiple mortgage lenders to increase your odds of getting approved. You may also want to do some research ahead of time to find out what a lender's max DTI is, to be sure it's worth your time applying.
Work on your compensating factors
The general rule of thumb is that if one area of your mortgage application is weak, you want the other ones to be strong. If you have a really great credit score and a large down payment, for example, you may be able to get away with a higher DTI.
FHA loans also sometimes allow high DTIs if a borrower has one or more compensating factors. Compensating factors include things like cash reserves, which means you have enough cash in the bank to cover a certain number of monthly mortgage payments.
If you have sufficient compensating factors, you could potentially qualify for an FHA loan with a DTI up to 57%.
Get on an income-driven repayment plan
If you're having a hard time keeping up with your student loan payments, you may be able to reduce how much you're paying with an income-driven repayment plan
"Borrowers can work with their student loan financing institution to help lower their student loan payments with income-based payment plans and/or alternative programs, which would reduce their overall debt obligation," English says. "As a result, they may be able to qualify for a larger purchase price for their home or more favorable mortgage terms."
If you have federal student loans, you can apply for an income-driven repayment plan on the Federal Student Aid website.
Pay down other debt
Shrinking your monthly debt obligations will lower your DTI. One of the easiest ways to do this, if you can afford it, is to pay down a credit card.
Keep in mind that the goal isn't necessarily to reduce the overall amount of debt you owe, but to lower your monthly payments. Paying off a chunk of your credit card debt can help with this because it lowers your monthly payment.
Other strategies to lower your monthly debt payments could include refinancing or consolidating your loans.
Increase your income
Obviously, this one is easier said than done. But if you can't lower your monthly debt payments, the only other way to decrease your DTI is to increase your income. You might consider applying for a higher-paying job to replace your current one, or taking on additional work with a part-time job or freelance gig.
Best mortgages for student loan borrowers
Conforming loans are a good pick for student loan borrowers who have high DTIs and not a ton of cash in the bank, since these mortgages allow DTIs up to 50% and down payments as low as 3%.
A government-backed loan may also be a good fit. FHA loans are often the best option for those with particularly high DTIs, and VA and USDA loans lower the barrier to homeownership by allowing 0% down payments.
Depending on what type of degree you have, you may also qualify for a specialty mortgage like a physician loan. Physician loans or doctor loans are geared toward those who have a lot of student loan debt but well-paying, stable careers in healthcare. Lenders may offer physician loans to doctors, dentists, and veterinarians.
Additionally, some lenders also offer more broad mortgage programs called professional loans, which are geared toward a variety of different professions that require expensive degrees. In addition to medical doctors, these mortgages can help optometrists, nurses, pharmacists, pilots, attorneys, and other professionals become homeowners, even if they have a large amount of student loan debt. Flagstar Bank is one lender that offers these types of loans.
Student loan mortgage FAQs
What is the new FHA rule for student loans?
The FHA updated its guidance for lenders on student loans in 2021. Previously, FHA lenders would have to use 1% of the student loan balance to calculate a monthly payment on certain loans. Now, if the payment listed on your credit report is $0, FHA lenders will calculate a monthly payment equal to just 0.5% of the balance.
Can I get a mortgage with a lot of student loans?
It depends on how much you pay each month relative to your income. If a large portion of your monthly income goes toward debt payments, whether those are student loans or something else, that could prevent you from qualifying for a mortgage because you have a high DTI.
Can you be denied a mortgage because of student loans?
Lenders will look at your overall financial situation to see how a mortgage could fit into that. If you spend so much on student loan payments every month that the lender believes you can't afford a mortgage payment on top of that, you could have your application denied.