Here's How to Buy a House With Student Loans

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Buying a home in any real estate market can be tricky. And buying a house with student loan debt is even harder.

But what about in 2022, with home prices at all-time highs and millions of Americans suffering the consequences of nearly $2 trillion in student loan debt?

House For Sale Sign

This article will explore:

  1. Determining whether you can afford to become a homeowner

  2. Steps you need to take if you're considering homeownership

  3. How to buy a home while still paying off student loan debt

Can you buy a house if you have student loans?

Of course you can. The better questions to consider here are as follows:

 

  1. Will you get approved to take on more debt in the form of a mortgage?

  2. And if so, are you comfortable doing so? Affording a mortgage is oftentimes a different story from just getting approved for one.

The first important metric to consider as it pertains to homeownership while already indebted is something known as your debt-to-income, or your DTI, ratio. Your DTI is essentially a measure of how much debt you hold, as compared to the amount of money that you make. To calculate your DTI, assure that you are including the following, if applicable:

 

  • Existing mortgage payment

  • Existing homeowners/renters insurance

  • Credit card debt

  • Car/auto loans

  • Student loan payments

  • Back taxes, child support, alimony

This is where the amount of debt you already hold plays the largest role. Most mortgage lenders will want you to meet the following two criteria to feel comfortable underwriting a loan:

 

  • No more than 28% of your monthly income (gross, meaning before tax) on your housing expense, which hopefully won't be an issue

  • Lenders also like to see you that you aren't spending more than 36% of your gross monthly income on servicing all of your debt.

 

Let's break this down a little bit more. Imagine for a second that your gross monthly income is $70,000 per year, $5,833 per month. Also, in this scenario, imagine that you have monthly student loan payments of $600.

 

This $600, which is equal to roughly 10% of your monthly income, still leaves you with plenty of room to play with.

 

BUT, just because the math dictates that you can afford a home, doesn't necessarily mean that you should do it.

 

You're likely to be a safer and much more secure homeowner if you can find ways to decrease your debt-to-income ratio.

 

Our free student loan calculator can help you to do this.

How to lower your debt-to-income ratio

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There are really only two levers you can pull in order to bring your DTI more into line. You can either:

 

  1. Increase your income

  2. Decrease your debt load

 

Let's start with the ways in which you can increase your income. Though not always glamorous, you can consider any of the following to help you:

 

  • Start working a second job

  • Bring in any side income that you can earn (niched side hustles are GREAT for this). You may be asked to prove that it is recurring revenue, however.

  • Create a passive income stream

  • Ask for a raise or retention bonus (especially in today's job market!)

 

Any or all of these strategies may be able to help you look like (and be) a more trustworthy lender on paper.

 

Of course, your other option is to decrease your debt load. And this may seem misleading, because in essence, you're actually looking to decrease your monthly debt expenditures, an exercise that can actually be accomplished fairly easily by adopting a new student loan strategy.

 

A few ways in which you may be able to lower your monthly student loan payment(s) are:

 

Your goal through any of these exercises is to show increased monthly free cash flow, money that isn't going to servicing your debt or paying any of your bills. But for this to work, you're going to need to assure that your lender isn't just evaluating your total debt load.

 

Since IDR or refinancing doesn't actually remove any dollars from your outstanding balance, and instead provides relief on a monthly basis, your mortgage underwriter may not see the benefits of these programs unless they compare your monthly debt payments and income situation.

You need to have good credit to make it work

Buying a house is hard enough with student debt. But it may feel insurmountable for the time being if you have bad or thin credit to be evaluated on. To maximize your chances at being offered a mortgage with a rate that you can truly afford, you're going to want to make sure to abide by the following.

Keep as high a credit score as possible

Your credit score is used by lenders (not just mortgage lenders, but all loan underwriters) as a way to estimate how risky you are to lend to. The riskier they deem you to be, the greater the chances that you get stuck with a bad interest rate or a denial altogether.

 

To maximize your chances of success, please use the below list of credit best practices.

 

  • Avoid having a "thin" credit file - you may need more history than successfully paying off one credit card monthly to be seen as a less risky borrower.

 

  • Avoid defaulting on any of your debts, including your student loans. If your student loans or any other debt has recently been in default, you're likely going to want to work to reestablish good credit before you apply for a mortgage.

 

  • Continue to aggressively pay down whatever debt you currently have. Not only will this improve your DTI ratio, but you'll also be demonstrating to future lenders that you have a track record of successfully paying back money that you've borrowed.

Factor in all the other costs for homeowners

You very well may be able to cover a prospective mortgage payment right now. And that's great news! But making your monthly payments is far from the only payment you'll have, especially initially. Make sure that you are prepared for the following expenses that are guaranteed to arise.

Affording a down payment and student loan payments

In reality, your biggest obstacle is likely to be saving enough money to put down in the form of a down payment. We recommend that you aim to put down as close to 20% of the price of the home as possible.

 

First, anything less than 20% down will trigger something known as private mortgage insurance, also known as PMI. PMI is essentially an interest rate "surcharge" that you'll have to contend with in response to your smaller down payment. It serves to protect the lender, and help bring their risks back into line.

 

Each percent that you put down as a down payment will benefit you. It will lower the balance that you are mortgaging, meaning lower monthly payments for you over the course of the mortgage.

 

The other way we like to frame this is to envision each extra percent that you put down as actual ownership in your home, which it is. And having this extra "equity" in your home will help keep your interest expenses down, especially in the event that mortgage rates continue to climb for the foreseeable future.

Other fees when buying a home

You're also going to want to pay attention to all of those other fees that can add up quickly throughout the home-buying process. Other potential fees that you'll want to be prepared for include:

 

  • Home inspection

  • Home appraisal

  • Title services

  • Real estate taxes (these will be ongoing)

  • Loan fees (origination fees)

  • HOA fees (if applicable)

  • Closing costs

These fees can really add up in a hurry. In total, a good estimate may be a few extra thousand dollars, all the way up to over ten thousand dollars, depending on the size of your home, the location, and who is responsible for paying closing costs.

Getting a mortgage with student loan debt

Getting a mortgage while paying off your student loan debt may prove to be a challenge, depending on the amount of debt you are trying to pay off simultaneously. But thankfully, you are far from being out of options.

Consider applying for an FHA loan

FHA loans, which are offered by the Federal Housing Administration, are generally more flexible than other mortgages out there, and may be available to Americans with credit scores in the 500s. You may still be disqualified if you are behind on your student loan payments, however.

 

But FHA loans require lower down payments, and are very popular with first time home owners in particular. And according to Investopedia, if you have a credit score of at least 580, you may be able to buy a home with as little as 3.5% down. And credit scores lower than that typically only require 10% down.

 

As long as you're timely on your student loan payments and can demonstrate that you're working towards establishing/reestablishing good credit, FHA loans can really help make a difference.

 

The other thing to note about the FHA program is that there is flexibility in the 28%/36% rule that we talked about above. Within this program, you may qualify for a mortgage as long as your DTI ratio is under 43%. But again, if your ratio is this high, please take some time to evaluate the risks that this presents to you and your family.

Check out Fannie Mae HomeReady loans

Lower income first-time (or repeat) homeowners may qualify to take part in this program that allows you to get a mortgage with as little as 3% cash down. Fannie Mae HomeReady loans are available to those with credit scores over 620, and for those that are looking to purchase or refinance.

 

If everyone listed on the mortgage is to become a first-time homeowner, then at least one person must complete mandatory training and education regarding owning a home.

State student loan and mortgage programs

Do some research to see if your state has any programs out there to assist first-time homebuyers. Maryland's SmartBuy3.0 program is a great example of this.

 

This program helps prospective homebuyers to receive a promissory note that allows them to complete their student loan repayment and buy a home in short order!

We've also written some state guides to programs designed to help first-time homebuyers nationwide.

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

Again, you do not need to wait until you are student debt-free to buy a home, but there is also a component to this process that is based on personal financial security and comfort. Before taking the plunge into home ownership, you're going to want to make sure that you're comfortable with your income situation, debt situation, and feel secure with your job status.

 

You're also going to want to assure that you have:

 

  1. A fully funded emergency fund

  2. Saved up for a down payment you are comfortably with

  3. A feeling that you are truly prepared for whatever may come next

 

Only after the answers to all of these questions are yes should one seriously consider taking that plunge.

 

And remember that there are tools that you can leverage and levers that you can pull to bring yourself closer to making this dream a reality.

 

Cutting your budget by $10,000, waiting an extra 3-6 months, and making a little more progress on your student loans first are just a few examples of things that you may consider.

 

We want to hear from you. Are you currently still in student debt and considering buying a home? Tell us in the comments below!

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