When buying a home, your debt is one of the factors lenders look at when determining if they are going to give you a mortgage loan. In the United States, an estimated 44.7 million people, or one in four, have student loan debt. The average amount of student loan debt per person is $37,172, and there is an estimated $1.53 trillion in the entire country. With such a massive student loan debt, is it possible to get a mortgage loan?
Student loans can affect if you are able to buy a home, but that does not mean it is impossible to buy your own home if you still owe on your student loans.
Approximately one-fifth of people who have student loans are denied a mortgage loan because of their debt-to-income ratio, which is the amount you make versus the amount you owe. The things that are factored into your debt-to-income ratio usually include student loans, credit card debt, vehicle loans, and child support.
According to the Federal Reserve, for the first five years after graduating, the chance of buying a home drops one or two percentage points for every 10 percent they have in loan debt.
The National Association of Realtors says that over 80 percent of people between 22 and 35 say their student loans are the reason they have not bought a home yet.
Lowering Your Debt-to-income Ratio
When looking at your debt-to-income ratio, most lenders are more likely to lend to someone whose debt-to-income ratio is 36 percent or less, and this is factoring in your estimated mortgage costs if they choose to lend to you.
While it can take some time, getting that ratio to 36 percent or less will help you get a mortgage loan, even if you have student loans. You can do this by paying off any credit cards or vehicle loans since they are smaller than your student loans, they can be paid off quicker. Keep in mind, having that ratio at the right amount is no guarantee that you can secure a home loan, but it is a step in the right direction.
If completely paying off some of your student loan debt is not an option, try consolidating your credit card debt to a single account. Putting all of the debt into a personal loan, instead of another credit card, helps. A personal loan has a fixed timeline for repayment, whereas a credit card changes as you spend more or pay it off. Overall, having a personal loan instead of a credit card can look better to a potential lender.
Lowering Student Loan Payments
If you do not have any other debt, but your debt-to-income ratio is still too high because of your student loans, one option is to try to lower your monthly loan payments. You can try to switch to an income-driven repayment plan, which can drastically lower your monthly payments. The problem with an income-driven plan is that it extends the length of your loans because you are reducing your payment so much.
Another option to lower your loan payments if you do not decide to use the income-driven plan is to have your student loans refinanced. The problem you may face if you decide to refinance your federal loans is that they become private; you will lose access to federal protections, loan forgiveness plans, and income-driven repayment plans. If you plan to refinance your student loans, do it at least six months before applying for a mortgage so that your payment history can offset any changes to your credit score that can come with refinancing.
About eight percent of people with student loans are unable to get a mortgage because of their credit score. If you cannot find a job, you may end up defaulting on your student loans, which impacts your credit. Approximately 40 percent of student loan borrowers are expected to default by 2023.
For example, Mike — who only provided his first name for privacy reasons — graduated in 2008 with over $200,000 in student loan debt. He was not able to find a job and ended up defaulting on his loans. “I just ignored it, there was no way — they were wanting $1,200 a month,” Mike said. As a result, his credit score went down to the low 500s, which is too low to borrow from most lenders.
Making payments for any debts, whether they are credit cards, student loans, or car loans, will help increase your credit score; about 35 percent of your credit score is your payment history. If you show a lender that you always make your payments on time and have never gone into default, they are more likely to give you a mortgage loan, even if you have a large student loan debt.
If you are trying to buy a house, saving up for a down payment can be a challenge, especially if you have a massive student loan and a large monthly payment to go with it. About 85 percent of people with student loan debt have said saving up for the down payment is hard when coupled with these loan payments.
There are other options for buying a home without having that 20 percent down payment. You can get mortgage insurance to lower the amount you need for your down payment. Some states also offer programs to help people buy houses, especially first time home buyers.