Can You Buy a House with Student Loans?

• Yes, you can buy a house with student loans, but you must have a qualifying debt-to-income ratio. Mortgage lenders typically focus on your monthly student loan payments rather than your total loan balance when calculating DTI.

• Federal student loans offer more flexibility than private loans in the home-buying process. Income-driven repayment plans for federal loans can lower your monthly payments and potentially improve your DTI.

• There are specific mortgage options available for student loan borrowers, including conventional loans like Fannie Mae HomeReady and government-backed loans (FHA, VA, USDA), which may have more flexible requirements for those with student debt.

Yes, you can buy a house with student loans. Student debt doesn’t automatically disqualify you from getting a mortgage loan. But it does but it impact your home-buying process and may affect your mortgage rates.

The main factor lenders consider when approving home loans is your debt-to-income ratio (DTI). Your student loans play a big role in this calculation, and your credit history and on-time payments are also huge. But recent changes in mortgage underwriting guidelines have shifted how student loans affect your DTI, making it easier for people with student loans to become homeowners.

For federal student loans, lenders focus more on your actual monthly student loan payment shown on your credit report rather than your total loan balance. This is particularly beneficial if you’re in an income-driven repayment plan, especially one with a low, non-zero dollar payment amount.

The situation is different for private student loans and personal loans. Without access to income-based repayment plans or loan forgiveness, your total loan balance will more directly affect your DTI. In this case, refinancing to get a longer repayment term and lower interest rate might help reduce the impact on your DTI and improve your personal finance situation.

Related:

• Can You Buy a House With $100k in Student Loans?

• FHA Student Loan Guidelines

• Freddie Mac Student Loan Guidelines

• VA Student Loan Guidelines

Student loans affect your debt-to-income ratio by increasing your monthly debt obligations, i.e., your payments towards auto loans, medical bills, credit card debt, and so on. Your DTI is a simple fraction: monthly debt payments divided by your gross monthly income. But how lenders calculate student loan payments for DTI varies:

• For federal loans on income-driven repayment plans, lenders often use your actual monthly payment.

• For loans in deferment or forbearance, lenders may use 0.5% to 1% of your loan balance as a theoretical monthly payment.

Related: How Student Loans Affect Your Debt-to-Income Ratio

Nearly all Americans with student loan debt owe that debt to the federal government. But for the remaining 8% with private student loan debt, the home-buying process can be more challenging. They have less flexibility to squeeze into eligibility requirements for first-time homebuyer loan programs through the FHA, Fannie Mae, and similar entities.

Related: First-Time Home Buyer Student Loan Forgiveness

Federal Student Loans

Federal loans offer several advantages when it comes to home buying:

• Income-Driven Repayment Plans: These can significantly lower your monthly payments, potentially improving your debt-to-income ratio.

• Loan Forgiveness Options: Programs like Public Service Loan Forgiveness (PSLF) may be factored into lenders’ decisions, sometimes excluding these loans from DTI calculations if forgiveness is on the horizon.

• Flexible Deferment and Forbearance: While these options can provide temporary relief, be aware that lenders may still include a percentage of the loan balance in DTI calculations.

Related: Do Parent PLUS Loans Affect Getting a Mortage?

Private Student Loans

Private loans present unique challenges:

• Fixed Payments: These are typically higher than federal IDR plans, potentially increasing your DTI.

• No Forgiveness Programs: The full loan amount will be considered in your long-term financial picture.

• Limited Repayment Flexibility: Private lenders rarely offer income-based options, making it harder to adjust payments to fit within mortgage qualification requirements.

If you have student loans, focus on mortgage programs with low down payments and favorable DTI calculations for student debt. These options can make homeownership more accessible despite your student loan obligations.

Conventional Mortgages

Conventional loans, which follow Fannie Mae and Freddie Mac guidelines, can be a good option if you have a strong credit score and stable income:

• Fannie Mae HomeReady: Allows down payments as low as 3% and DTI up to 50% for those with income below 80% of the area median.

• Freddie Mac Home Possible: Similar to HomeReady, with flexible down payment options and co-borrower allowances.

Remember that for both programs, if your IDR plan shows a $0 payment, lenders typically use 0.5-1% of your loan balance as the monthly payment for DTI calculations.

Government-Backed Loans

These loans often have more flexible requirements for credit scores and DTI ratios:

• FHA Loans: Accept DTI ratios over 50% for well-qualified applicants. They use your actual IDR payment if above $0, or 0.5% of the loan balance otherwise.

• VA Loans: Available to eligible service members and veterans. They may not count deferred student loans in DTI if deferment lasts 12 months post-closing.

• USDA Loans: Offered in eligible rural areas with no down payment required. Maximum DTI is typically 41%.

Related: Do Deferred Student Loans Affect Getting a Mortgage

Professional Mortgages

Some lenders offer special programs for professionals like doctors who often have high student debt but strong earning potential. These portfolio loans may not count student loan payments in DTI calculations.

Related: Mortgage Denied Due to Student Loans?

1. Check and improve your credit score: Your credit score significantly impacts your mortgage eligibility and interest rates. Pay bills on time and reduce credit card balances to boost your score.

2. Calculate your DTI: Lenders typically prefer a DTI of 43% or less. Consider income-driven repayment plans for federal loans to lower your DTI.

3. Get preapproved for a mortgage: This helps you understand how much house you can afford and strengthens your position with sellers.

4. Save for a down payment: Aim for 20% to avoid private mortgage insurance (PMI), but know that smaller down payments are possible with certain loans.

5. Research first-time homebuyer programs: Many states and cities offer down payment assistance programs or favorable loan terms for first-time buyers. For example, the Illinois Housing Development Authority can assist homebuyers with up to $10 thousand.

6. Choose the right mortgage type: Conventional, FHA, VA, or USDA loans each have different requirements and benefits for student loan borrowers.

7. Factor in PMI costs: If your down payment is less than 20%, you’ll likely pay PMI. This additional monthly cost protects the lender and should be included in your budget calculations.

8. Prepare necessary documentation: Prepare your tax returns, pay stubs, student loan statements, and other financial documents for the mortgage application process. I typically suggest my clients keep a digitally encrypted folder on their computer with these files. This way, they can easily share the folder with their loan officer when the time comes.

While IDR plans can be beneficial for many borrowers, they may not be the best fit for everyone. Individuals with higher incomes or Parent PLUS Loans may find other repayment strategies more suitable.

Other Repayment Plans

Here are a few other repayment options that might better suit those with higher incomes:

• Standard Repayment Plan: This is the default plan that involves fixed monthly payments over a 10-year period. For high-income individuals, this plan could offer lower payments compared to IDR plans, potentially improving credit scores and mortgage eligibility.

• Graduated Repayment Plan: In this plan, payments start low and gradually increase every two years. This can ease early repayments but may lead to higher payments later on, potentially impacting your ability to save for a down payment or manage a mortgage.

• Extended Repayment Plan: This plan extends the repayment period for your loan to 25 years, which leads to lower monthly payments but higher overall interest paid. While it can free up more monthly income for a mortgage in the short term, it also means carrying debt for a longer time.

When choosing a repayment plan, think about how it will affect your overall financial situation and your goals of owning a home. Getting advice from a financial advisor or mortgage lender can give you valuable insights to help you make an informed decision.

Related: Can Cosigning a Student Loan Affect Your Homeownership?

Buying a home with student loans is challenging but achievable. Understanding how your student loan balance affects your debt-to-income ratio and exploring various loan options can improve your chances of qualifying for a mortgage.

When assessing your financial situation, remember to consider all aspects of homeownership, including closing costs and monthly mortgage payments.

With careful planning, good credit management, and possibly exploring additional income sources like a side hustle, you can balance student loan repayment with your homeownership dreams.

Consult with mortgage lenders experienced in working with student loan borrowers to determine the best course of action in your home-buying journey. And if you need help managing your student loans to qualify for a mortgage, book a call with one of our student loan experts.

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