Student Debt Won’t Flunk You out of Homebuying

Posted by Lisa Matthew
2
May 17, 2022
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Some homeowners with student loan debt wonder if they will be disqualified from buying a house. More than 43 million people owe student loans. Although student loan debt can present some challenges when trying to buy a home, it is not an impossible issue. So get your pencils ready... school's in session.

How do Student Loans Impact Home Loan Applications?

When you look at the total amount you owe in student loans, you may think you won't qualify. Lenders want to know you can pay back your home loan, so they include your student debt. A lender, however, is less concerned about the total amount of your student debt and more interested in how it compares to your income.

Lenders examine your debt-to-income (DTI) ratio, which is how much you owe in monthly debt payments versus your gross monthly income.

As a rule, lenders accept DTIs up to 43%, though most prefer to work with borrowers with DTIs of 36% or lower. Government-backed loans accept higher DTIs. U.S. Department of Agriculture loans will accept 41%, and Federal Housing Administration loans will accept 50%.

What Other Factors Do Lenders Consider?

Lenders don't just look at your DTI; your credit score is also important. It's like a grade you receive based on how you've managed your credit. A FICO score of 620 is required to qualify for a conventional mortgage, although you may qualify for special loan programs if your score is lower.  

In addition to your employment history (usually at least two years), home lenders will examine your assets, such as your checking and savings account balances, investments, and retirement accounts.

What Should I Think About Before Applying for a Home Loan?

Most people spend the most on the down payment, however. You've probably heard that you need to pay 20% down, but many put down less than that. According to the National Association of Realtors®, in 2021, the average down payment was just 12%, and buyers did not pay closing costs until their houses closed. You'll pay less interest over the life of a loan if you put down more money upfront, but don't let that 20% figure keep you from exploring your loan options, especially now when mortgage interest rates are near historic lows.

What if Student Debt Is Holding Me Back?

If your DTI is too high to qualify for a home loan (and you've spoken with a mortgage lender), it's natural to feel discouraged. But don't give up. Follow these steps to improve your financial situation and get closer to your goal of owning a home.

Keep current on all your debt payments, including your student loans. To find a repayment plan that works for you, speak to a credit counselor or financial advisor.

Avoid accumulating new debt, especially when you get close to starting the application process. The DTI number is just two parts, debt, and income. Controlling your spending is easier than increasing your income.

Start saving now. Invest in the down payment and the emergency fund now, even if buying a home is a long way off.

Your dream home will be waiting for you if you focus on the factors within your control and don't give up if you don't have an A+ on your homebuying readiness.

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