Do you hear that? It’s homeownership… calling your name. You’re sick of that growing rent payment. And maybe you’re thinking of adding some tiny humans to the mix, or your fur babies need a yard. But you’ve also got student loan debt. How do student loans affect buying a house? Will you still be able to afford it? Will you be able to get a mortgage?
Buying a house with student loans
The short answer is yes. Buying a house with student loans can be a bit more challenging than making the purchase without student debt. But, it could also be the smartest move of your adulthood. And yes, you can probably get a mortgage with student loan debt, with a bit of planning.
Mortgage lenders usually consider three things when you apply for a home loan: your income compared to your debt, your credit score, and your down payment. Student loans have an impact on all three, but some of those impacts are actually positive. Let’s take a closer look at each essential factor.
Your student loans and your home loan payment
One of the first things a mortgage lender will look at is how your monthly income compares to the monthly payments you owe. They call this your debt to income ratio (DTI). Your DTI tells the mortgage lender what percent of your income (before taxes) you spend on regular debt payments. Of course, student loan payments factor into your monthly debts. So do car payments, credit card payments, and anything else owed on a regular basis.
Most lenders look for a DTI at 40% or lower (including your future mortgage payment). That means, once you have a home loan on your hands, you’ll spend 40% of your income–or less–on repaying debt. You can use this basic benchmark to calculate what you might be able to afford in a mortgage payment. But you also need to know that a 40% DTI isn’t a hard cut-off point. You might be able to get a home loan with a higher DTI or you might want to stay way under that percentage.
Okay, let’s say you earn $4,000 each month. 40% of your monthly income is $1,600. That means your total debt payments shouldn’t exceed $1,600. If you spend $200 on your student loans, $200 on your car payment, and $100 on your credit card, you could have about $1,100 leftover for a mortgage payment.
- Maximum debt calculation (for most lenders): 4000 X 0.4 = 1600
- Remaining debt budget for home loan: 1720 – 200 – 200 – 100 = 1100
Want to crunch your numbers? Multiply your monthly income by 0.4. Subtract your student loan payment, car payment, credit card payment, and any other loan or alimony payments. Whatever is remaining can serve as a reasonable estimate of your future maximum mortgage payment (including taxes and insurance).
How to estimate your maximum mortgage payment
Your gross monthly income X 0.4 – debts paid monthly = estimated budget for monthly mortgage payments
You can also try out our mortgage calculator to test different home prices against your DTI.
Yeah, your student loan payments mean you won’t have as much to spend on a home loan. But they don’t mean you can’t get one. A mortgage professional can help you factor student loan debt into a mortgage amount that fits your lifestyle.
Mortgage terms to know
- Debt to income ratio (DTI) – the percentage of your monthly income spent on debt payments
- Gross monthly income – the money you earn each month before taxes are taken out
How does your credit score factor in?
Now you know your student loan payments might not crush your DTI. That’s great news! But what about your credit score? Well, student loans can actually help improve your credit score over time. The long-term nature of the loans can lengthen your credit history. And a longer credit history is a better credit history. Student loans can also help diversify your credit mix. A diverse credit mix means you have a variety of loan types. So those days mixing cramming for finals with campus frisbee matches might pay off in more ways than you thought.
Just remember that student loans can only help strengthen your credit score if you pay them on time each month. We realize this isn’t possible for everyone. Check out some debt relief programs if you struggle to make your monthly payments.
What if I haven’t saved much for the down payment?
Okay, okay. Your DTI and credit scores could be just fine. But how on earth are you going to save up for a down payment with those student loans nagging at your finances every month? Of course, the more money you have for your down payment, the less you’ll need to take out on your mortgage. But that popular idea that you need to have 20% down to buy a house… it’s flim-flam. You’ll only need about 3-3.5% down for most mortgages. And if you qualify for a USDA or VA home loan, you can get a mortgage with a 0% down payment.
Mortgage terms to know
- Private mortgage insurance (PMI) – This added monthly fee protects your lender if you make a down payment of less than 20% when you buy a home with a conventional mortgage.
- FHA home loan – This type of home loan allows for lower credit scores and a minimum down payment of 3.5%. But the flexibility of FHA loans comes with a tradeoff. You’ll need to pay mortgage insurance on an FHA loan, regardless of your down payment. This includes an upfront premium paid at closing, and monthly amounts included in your mortgage payment.
- USDA home loan – This type of home loan is for qualifying rural homebuyers. USDA home loans don’t require a down payment or private mortgage insurance. But USDA loans do require an annual guarantee fee that acts like mortgage insurance.
- VA home loan – This type of home loan is for qualifying veterans and surviving spouses. VA home loans don’t require a down payment or mortgage insurance.
You might even qualify for a first-time homebuyer grant, which can help cover your down payment or closing costs.
Student loans and home equity
So, do student loans affect buying a house? To be honest, yes. But homeownership can still be attainable.
If you’re making those student loan payments happen, buying a house could be the most brilliant move you can make. Since you have to pay housing costs–whether you own or rent–putting those payments toward home equity can help you build wealth over time. And you can only do that if you own a home.
It sounds pretty nice, anyway. Doesn’t it? College grad. Homeowner. Wealth-builder. You could have it all.
Since you have to pay housing costs_whether you own or rent–putting those payments toward home equity can help you build wealth over time. And you can only do that if you own a home.