It’s no secret that buying a house is a huge financial undertaking. For many people, it’s the most expensive purchase they’ll ever make.
And if you’re one of the millions of Americans saddled with student loan debt, you might wonder if homeownership is possible.
But don’t despair.
Student loan debt isn’t different from any other debt. In fact, according to the most recent data from the National Association of Realtors, around 37% of first-time homebuyers have student loan debt.
Of course, having student loans doesn’t make buying a house easy. Let’s take a look at buying a house with 100k student loans.
Debt-to-Income Ratio: How Home Affordability is Decided
Your debt-to-income (DTI) ratio is one of the key factors that lenders look at when you’re applying for a mortgage.
This ratio compares your monthly debt payments to your monthly income and gives lenders an idea of how much wiggle room you have in your budget for mortgage payments.
Ideally, your DTI ratio should be 36% or less.
But if you have student loans, your lender can use a debt-to-income ratio of 43% when determining how much house you can afford-meaning that your other debts (including your student loan payments) can’t exceed 43% of your monthly income.
The DTI ratio depends on your lender and the loan product. FHA loans have a DTI ratio of 31/43, while conventional loans have a DTI ratio of 28/36. If you have a lot of student debt, an FHA loan may be the best option.
FHA loans are generally the most flexible type for first-time buyers, although they have some constraints regarding appraisals and inspections.
The higher your income, the more house you can afford-even with student loan debt.
How Student Loans Impact Your Debt-to-Income Ratio
So, as you can see, it’s not about how much you owe on your student loan. It’s about your monthly payment.
If you have $100,000 in student loans, your student loan payments are probably around $1,000 a month.
But let’s say you make $80,000 a year. If your student loans are your only debts, your DTI is only 15%. You could likely get a mortgage of anywhere from $1,000 to $1,800 without hitting that backend DTI amount, even with that student loan debt.
Of course, there are other things to consider besides your student loan debt, like your credit score and down payment. And credit cards, personal loans, and car loans will all impact your income ratio just as much as student debt.
But the point is, don’t let student loan debt hold you back from buying a house. Most people will spend years paying off their student debt. That’s years when they could also be building their equity.
Should You Wait to Payoff Your Student Loans Before Buying a House?
It’s a valid question. After all, the less debt you have, the more house you can afford—right?
Well, not necessarily.
First of all, if you have federal student loans, you might be able to lower your monthly payments by enrolling in an income-driven repayment plan.
There are four different plans, but they all work similarly. You make payments based on your income, family size, and state of residence-not the amount you owe.
The result is a lower monthly payment, which can help free up some cash for things like a mortgage payment.
Income-driven repayment plans also offer loan forgiveness after 20 or 25 years-meaning that if you still have a balance left on your loans, it will be forgiven.
But also, most student loans will take 10 to 15 years to pay off. Throughout that time, the housing market will be gaining value.
If you have to pay rent anyway, why not pay a mortgage?
What Else Impacts Your DTI?
A lot of people worry about student loans. But in reality, car payments and credit card payments frequently have more of an impact on DTI. By paying off your car, credit cards, and personal loans, you can drastically shift your DTI and how much you can afford.
It may not always be obvious because the calculations aren’t done on total debt but on your monthly payments. So, if you have a personal loan out for $5,000 and your monthly payment is $500, that could impact you considerably. If you have a personal loan out for $5,000 and the monthly payment is $70, that’s a different story, even though the total debt is unchanged.
Just because you can afford a house and a student loan payment doesn’t always mean it’s a good idea. There are other considerations, too.
Other Considerations When You Have Student Loans
In addition to your debt-to-income ratio, there are a few other things to remember if you’re looking to buy a house with student loans.
First, your credit score matters—a lot.
Your credit score is a number that lenders use to determine your risk as a borrower. The higher your score, the lower your interest rate will be. And the lower your interest rate is, the more house you can afford.
If you’ve missed payments on your student loans or recently acquired your student loans, you may have a bad credit score. You should rehabilitate that score before you start looking.
And there’s another critical reason people often think about paying off their student loan debt first.
The interest rate.
If you’re paying 6% on your student loan debt, doesn’t it make more sense to pay off your debts before purchasing a house?
In a vacuum, yes. But the reality is that rent rates increase as quickly as inflation. And in many markets, rent is almost the same as a mortgage.
If you can live with your parents, pay down your student loan debt quickly, and then buy a house, paying off debts before taking on more debt may make sense.
But if you’re paying rent regardless, the calculations change.
Can Defaulting on Student Loans Put Your House at Risk?
Another thing people worry about is potentially losing their homes if they stop paying their student loans. Most people know student loans can’t be discharged during bankruptcy, so they worry about purchasing a home or anything else while still having student loans.
If you default on your federal student loans, the government has a few options to collect payment. But the one thing the government can’t do is take your house. Your house is protected even if you default on your student loans… although a federal student loan default can lead to wage garnishment (which could impact affordability).
That doesn’t mean defaulting on your student loans is a good idea. Defaulting will damage your credit score, making it harder to get a mortgage—or any other kind of loan—in the future. But you shouldn’t worry about losing your future house to a federal or private student loan.
That brings us to another question.
Can You Buy a House if Your Student Loans Are In Default?
If you default on your student loans, you might think homeownership is out of the question. But that’s still not necessarily true. You need to get your student loans out of default first, which may not be as difficult as you think.
There are a few ways to get your student loans out of default and start working on your bad credit:
- Repay the full amount of the loan. This is the most difficult option, but it’s also the one that will have the least long-term impact.
- Rehabilitate your loans. You make nine voluntary, on-time, full monthly payments with this option. Once you’ve made those nine payments, your loans will no longer be in default.
- Consolidate your loans. This option doesn’t get your loans out of default, but it does make them easier to repay by combining all of your federal student loans into one loan with one monthly payment. A direct consolidation loan can also help you get a lower interest rate.
So, you have to resolve the situation first. But don’t assume that you can’t purchase a home because you’ve been in default in the last few years. The process is more flexible than you think.
How Can Student Loans Adversely Impact Your Home Loan?
The biggest issue with student loans I’ve seen is when the amount is unexpected.
You can defer student loans for some time. So, a borrower might not report their student loan payments or a lender might not catch it until the last minute.
Then, when the monthly payment gets included in the debt-to-income ratio, it often throws things off just enough to make a difference.
Alternatively, payment amounts may be on an income-based plan and then fall out of that plan or increase the amount dramatically. Again, when that happens late in the mortgage process, it throws the entire lending process off.
As with other debt, you have to be careful about your student loans and report them. But other than that, student loans are like any other kind of debt.
Getting a Mortgage When You’re Still in School
Finally, here’s an interesting question. Can you get a mortgage while you’re still in school?
Technically, you can get a mortgage when you’re still in school. But it’s not always the best idea. You likely won’t have much income while still in school, making it difficult to afford a mortgage payment.
Plus, if you’re not employed yet, it may be difficult to get approved for a loan in the first place. Lenders like to see steady work history. So, if you’re still in school, you may have trouble getting approved for a mortgage.
Of course, there are exceptions to every rule. For instance, what if you’ve just returned to get your master’s?
This is interesting because most student loans are deferred while attending. And if you aren’t going to graduate in the next two years, most lenders won’t even calculate your projected student loans into your mortgage.
But you should still consider whether it will be affordable for you. Can you get a job that will handle the additional financial strain?
Student loans don’t have to keep you from homeownership. You need to be careful about them and understand how they work.
Be honest with your lender, outline your financial situation, and ask them about your options. You may be pleasantly surprised to know exactly how much you can afford.
Regardless, if your long-term plans include buying a house, you should start talking to lenders and finding out more now. The sooner you start, the easier it will be.
The first step is to get your student loans out of default. You can do this by repaying the full amount of the loan, rehabilitating your loans, or consolidating your loans. Once you’ve done this, you can start talking to lenders about getting a mortgage.
It’s possible to get a mortgage while you’re still in school, but it’s not always easy. You’ll need to have a steady income and good credit to qualify. Talk to a lender about your options.
If you’re struggling to make your student loan payments, you can do a few things. You can try to consolidate your loans or rehabilitate them. You can also look into income-driven repayment plans.
The best way to pay off your student loan debt depends on your situation. If you can afford it, you can try to pay them off as quickly as possible. If you’re struggling, you might want to consolidate your loans or look into an income-driven repayment plan.