Can I Get Approved for a Mortgage with Student Loan Debt?
Getting approved for a mortgage when you have college debt can be complicated – but having student loans does not mean an automatic denial. Nearly 46 million Americans have student loan debt as of 2022, and many of those holding loans are looking to be homeowners soon.
If you owe a student loan debt or are planning to buy a home in the future with someone who owes, don't fret! Owning a home is not out of the question. Knowing how mortgage approvals are determined and what to expect will help you on your way to homeownership.
Many Americans Hold Student Loan Debt
According to the most recent information from the U.S. Department of Education, as of March 31, 2021, student loan borrowers in the United States owe a collective $1.6 trillion in federal and private student loan debt.
Borrowers ages 25-to-34 are the most likely to hold student loan debt for a total of $500.6 billion, but the most debt – over $600 billion – is owed by those 35-to-49.
The average monthly student loan payment, according to the Federal Reserve, is $393, with a median payment of $222. While these monthly payments do not sound like much when compared to the average mortgage payment, paying off student loans can take anywhere from 10 to 30 years and accrue thousands of dollars in interest.
Keep in mind that most recent grads are usually starting off at entry level salaries, so the average monthly payment does make a difference for future savings for a down payment.
The Difference Between “Good” and “Bad” Debt
Student loan debt, despite its high average balance and negative reputation, is known as a good debt, or at least a gray area.
Good debt is borrowing money for something that will appreciate and make the loan worth the investment. Debt that is manageable within your budget and ultimately benefits you can be considered good. Examples of good debt include mortgages and business loans and other instances where “it takes money to make money.”
Bad debt is borrowing money for something that will depreciate over time or won’t generate income. While auto loans may be unavoidable for many, the vehicle loses value by the time you leave the lot. For other debts, like credit card debt for clothing or consumables, be sure to pay off your balance before accruing interest.
Based on these descriptions, it’s easy to see why student debt may fall in the center of these two categories. Student debt can be considered a strong or weak investment dependent on the type of degree obtained or earning potential of the chosen career.
Calculate Your Debt-to-Income Ratio
Debt-to-income ratio (DTI) is the percentage of your monthly income that goes towards paying off monthly debt payments. In addition to metrics like your credit score, lenders look at your DTI to determine your borrowing risk, or the likelihood of you defaulting on the loan.
To calculate your DTI: add all your monthly debt payments together, then divide that number by your gross (before tax) monthly income. See the charts below for an example.
| Calculating Monthly Payment Total | |
|---|---|
| Payment Type | Monthly Payment |
| Mortgage/Rent | $1400 |
| Auto Loan | $500 |
| Student Loan | $400 |
| Other Debts | $100 |
| Monthly Payment Total | $2400 |
| Calculating Debt-to-Income Ratio Example | |||
|---|---|---|---|
| Monthly Payment Total | Gross Monthly Income | Debt-to-Income Ratio | |
| $2400 | ÷ | $5700 | 42% |
Knowing your debt-to-income ratio is one of the best ways to measure your ability to afford monthly mortgage payments. According to the Consumer Financial Protection Bureau, a debt-to-income ratio of no more than 43% is typically the maximum amount a borrower can have and still get qualified, but borrowers should aim for 36% or less.
Student loan debt is a part of DTI and is considered when qualifying for a loan. If the monthly student loan payment is listed on the credit report, that payment is factored into the DTI calculation. If the payments are deferred and no payment is listed on the credit, the lender can use a default payment of 1% of the loan balance or the Income Based repayment amount provided by the student loan lender.
When buying a home with a partner, family member, or friend, it doesn’t necessarily matter if one person has loans or not, because it’s the total income vs. the total debt that matters. However, if one borrower has significantly lower credit scores than the other, it would be a good idea to see if the DTI ratio would qualify without the person who has a lower score being on the loan. Then, the rate and fees will be calculated on a higher credit score. Just keep in mind that only the borrower(s) on the loan has their income used in the calculation.
Most importantly, you should have a good understanding of your monthly budget, future household earning potential, and understand how buying a home fits into your long-term investment and retirement strategy.
Reducing or Eliminating Student Loan Debt Before Buying a Home
Buying a home before or after paying off debt depends on the individual’s situation. Paying the loans down would only be advised if the debt-to-income ratio was too high and debt needed to be paid off to have a qualifying DTI percentage.
Conversely, paying off debt could hurt an applicant if it reduces assets, one of the qualifications to purchase a home. You want to have enough assets to make a down payment, pay the closing costs, and keep additional assets for potential reserves.
Getting Approved for a Mortgage with Student Loan Debt
Buying a home while owing student loan debt is not impossible. Every situation is different and only a qualified lender can give you the best advice for your particular situation.
Our partners at First Heritage Realty Alliance, a real estate firm owned and operated by the team you trust at American Heritage, can help you buy the home for which you've been searching. Meet with our experts and learn about home buyer programs, selling a home, finding your perfect home, and more.
If you’re ready to get started today, visit us online or in your local branch. We can’t wait to help you find the home of your dreams!
