Student loan debt could make it harder to buy a house, but it doesn’t make it impossible.
When mortgage companies decide who gets approved for a home loan, they typically consider your debt obligations, credit rating and employment history. Student loan payments can have a negative impact on your debt-to-income ratio, or DTI, and how underwriters view your debt obligations. In short, if underwriters feel you won’t be able to afford the monthly mortgage payment due to your student loans, they probably won’t approve you.
Student loan payments can also make saving for a home down payment more difficult. Depending on the type of mortgage you want, you could be expected to put down as much as 20% of the home purchase price. And you could need an additional 2% to 5% of the loan amount to close on the loan. Loan companies will thoroughly investigate your finances to be sure you’ll have the cash necessary for the down payment and closing costs.
Because mortgage companies consider your monthly income and expenses to gauge financial health, the size of your student loan payment is more important than the overall debt total.
If you have stable income, pay your bills on time and are on track with your emergency fund and retirement savings, you may be in a good position to buy a house despite your student loans. Here are some options to make your application stronger.
Pay off other debt
Consider paying off smaller debts. These could include personal loans, credit cards or a car loan. Eliminating those recurring payments will improve your DTI, which signals to mortgage companies that you have increased cash flow and space for a house payment.
And while paying off a loan may not immediately boost your credit score, paying off revolving debt, like a credit card, could have a big impact. Your credit card limit appears on your report as available credit. Using less of your available credit can lead to a higher credit score.
Refinance all student loans
Refinancing is available for federal and private student loans; it combines your debts into one private loan. This process can lower your monthly payment by decreasing your interest rate. You can shrink your payment even further by stretching out your repayment term. However, extending your term can increase your total repayment costs.
Let’s say you have $29,000 in student loans, which is about the average debt for a bachelor’s degree in the U.S. With a 10-year repayment term and 6% interest rate, your monthly bill is about $322, and the total interest you pay over the course of your loan is $9,635. If you refinanced to a 5% loan and stretched out your term to 15 years, your monthly payment would be about $229, and the total interest you’d pay over the course of your loan would be $12,279.
Refinance your student loans at least six months before you apply for a mortgage, and make all payments on time to get the greatest boost. This will allow your credit score to bounce back from any negative effects caused by the hard credit pull or new line of credit that comes with the refinance. It’ll also give you the opportunity to take the money you save on your monthly payments and put it aside for your down payment or closing costs.
Consolidate federal student loans
Student loan consolidation allows you to combine multiple federal student loans through the Department of Education. Unlike private student loan refinance, consolidation is only available for federal loans. Though consolidating won’t change your interest rate and could wind up costing you more over the life of the loan, it could help you decrease your payments by extending your loan term.
Increase your income
Mortgage companies like to see a stable work history of at least two years. This work history doesn’t necessarily have to be at the same job, but any gaps in your employment can be a red flag.
One sure way to improve your DTI is to make more money. You can do this by taking on a part-time job, or by upgrading your main hustle for a job that pays more. The longer you have your new income stream, the more persuasive your application will be. But even with a new job, you might be OK. If you can demonstrate a strong and consistent work history — and your new job comes with a higher salary — underwriters are more likely to accept it.