In 2019, the Federal Reserve issued a report showing that student loan debt prevented about 400,000 young families from purchasing homes, accounting for about a quarter of the drop in home-ownership rates in this demographic in the previous decade.
Let’s face it, it’s pretty easy to talk yourself out of getting a mortgage if you’re still making monthly student loan payments. Why would you want to take on more debt before paying off the loans you already have, or before you can afford it? Besides, you might feel like lenders won’t let you buy a house if you already have debt. (Right?)
Not necessarily. There are plenty of people who qualify for a mortgage while paying off student loans. And there are many situations in which buying a house while you pay off your loans is actually a good money move, like if:
- Your mortgage payments would be less than what you’re paying in rent
- You live in a buyer’s market
- You can take advantage of low mortgage interest rates
Plus, putting your money towards a mortgage payment, instead of rent, means that you’ll be building equity in real estate–planting seeds for your financial future. Student loans tend to have relatively low interest rates and home prices can rise every year.
It’s possible to get a mortgage if you have student loan debt–but it will take some planning and intentional money moves.
Why it’s hard to buy a house with student loan debt
There are news stories everywhere about how young Americans aren’t buying houses. Why?
We are living in a completely different economic environment than our parents and grandparents. In just a few decades, the cost of a secondary education has skyrocketed, forcing students to start their financial lives by taking on more debt than ever before. Those who take on the most debt–medical students, law school students–are more likely to be able to pay it off, due to the high incomes afforded in their fields (only 16 percent of adults with $100,000 or more in loans are behind on payments, compared to 22 percent of borrowers with $10,000-$24,999).
But many students, especially those who aren’t able to complete their degrees – struggle to make ends meet. Thirty-seven percent of people who took out student loans but never completed an associate or bachelor’s degree are behind on their payments. Between high student loan payments, low wages, and the ever-increasing cost of living in America, a lot of Americans are living paycheck to paycheck, keeping buying a home just out of reach.
Getting a mortgage while paying off student loans is not impossible—but it may be more difficult for you to qualify. Here are some reasons having student loan debt might keep you from getting approved (and what to do about them).
Student loan debt affects your debt-to-income ratio
When you’re taking out a loan, lenders want to see that you will be able to make your payments consistently, which is typically harder to do if you have a lot of debt. One reason that it might be harder for you to get pre-approved for a mortgage if you have student loan debt is that your debt-to-income ratio might be too high.
Terms to Know: Debt-to-income (DTI) ratio
The debt-to-income, or DTI, ratio compares your monthly debt obligations with your gross income (your income before taxes and other withholdings are taken out). According to the Consumer Financial Protection Bureau, lenders like to see a ratio of 43 percent or less.
Your student loan payments may push you into a higher ratio, which may disqualify you for a mortgage with some lenders. You might be able to lower your debt-to-income ratio by taking advantage of federal loan repayment plans, or by refinancing your student loan debt (more on those below).
To find your ratio, add up all your monthly debt payments (auto loan, student loan, credit card, personal loan, etc., payments) and divide them by your monthly gross income.
*Debt-to-income ratio = How much you pay for all debt each month / Your gross monthly income *
Money Tip: Consider refinancing your student loans
One of the best ways to lower your debt-to-income ratio and free up some cash flow is to refinance your student loans. When you refinance, you can often get lower monthly payments and save money on interest, making it easier for you to pay off your student loan debt faster.
Student loan debt makes it harder to save for a down payment
Another reason it’s hard to buy a house when you have student loan debt? Typically, people use cash savings to cover the cost of the down payment. If you’re making monthly payments towards your student loans, you have less money to dedicate to saving for a down payment or other costs associated with buying a home.
How much do you need to have saved to make a down payment?
When you’re browsing through houses on Zillow or Realtor.com, you might see estimated monthly payments and think: *Hmm, that doesn’t sound so bad! That’s less than my rent! *
But those estimated monthly payments can be misleading, because they might assume a larger down payment than you might be able to afford. Instead of relying on those to determine how much house you can afford, you’ll first want to figure out how much you will be able to put down as a down payment.
However, many sources will recommend putting down more than that: Around 20 percent. This is because if you put down less than 20 percent of the full purchase price on either loan, many lenders will require you to buy mortgage insurance (called PMI on conventional loans and MIP on FHA loans), which will add another .5-1% of the loan amount to your house payment annually until you’ve paid back a certain amount of the home’s value.
Money Tip: Save faster in a high-yield account.
You’ll need to have some cash savings in order to cover your down payment and other costs related to buying your home. To save money faster, put it to work for you by keeping it in a high-yield account, which will earn more than a regular checking or savings account.
- A Simple high-yield checking account is a smart, flexible option that allows you to earn interest on your balance right in your Simple account.
- You can also deposit $250 or more into a no-penalty Simple CD (Certificate of Deposit) to earn a guaranteed fixed rate with added peace of mind.
Get your finances in shape for a mortgage loan!
Many of the requirements for getting a mortgage are things you should be working to do in your financial life anyway: Paying your bills on time, eliminating any other debts, building up some savings, and keeping your credit score in check.
Taking on a home loan is no small commitment–so it’s definitely not something to rush into. Here are some tips to help you prepare your finances for applying for a mortgage loan, whether you’re looking to buy in the near or distant future.
|Prepare yourself financially by:||Why:|
|Establishing a stable income||To be able to pay your mortgage each month without stress|
|Working on building healthy credit history (learn how here)||To show lenders that you have a record of low credit utilization and paying your bills on time|
|Working to lower or eliminate your credit card debt||To avoid having to pay more in interest on your credit card debt over time|
|Developing a solid debt repayment plan||To make sure you have a plan for paying off your debt in the long-term (learn more here)|
|Saving up for a down payment (learn how much here)||To avoid paying PMI (private mortgage insurance) if possible, and to secure a lower interest rate on your mortgage loan|
|Saving an additional 2-5% of home value for closing costs||To avoid going into debt to cover these expenses|
|Building up an emergency fund||The more money you have saved up, the less you have to worry about whatever home repair you might need (learn more here)|
Be at home with your loans
While buying a home with student debt is hard, it’s not impossible. The steps you will need to take to qualify for a mortgage loan are likely steps that you’re already taking to grow in your financial life. Whether you’re thinking about getting a home in the near or distant future, we hope that these tips will help you create a solid plan to help you prepare for your next steps.
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