How to Get a Mortgage with Student Loans

by Andrea Kornstein

Picture of a house

Home ownership is a milestone moment most of us aspire to hit. It’s a central tenet of the American Dream, after all. Unfortunately, many young adults who are saddled with college debt remain dubious about their purchasing ability. And they wonder if getting a mortgage with student loans is even possible.

Well, if you’re one of the millions feeling burdened by your educational overhead, you can breathe a sigh of relief — it is possible for you to buy a home. There are just a few points to take into consideration when trying to qualify for a mortgage. 

Calculate your debt to income ratio (DTI)

One of the most critical factors in determining your eligibility for a mortgage is your debt to income ratio (DTI). This is a figure that lets lenders know if you’ll have enough cash flow to cover your mortgage payments on top of your student loans (and any other debts). There are two components to your DTI: the front-end ratio and the back-end ratio. 

  • The front end consists of the ratio between your gross monthly income and your anticipated mortgage payments (including principal, taxes, insurance and interest). To be considered a strong candidate, your DTI should be no higher than 28% on this end.
  • The back end is the ratio between your earnings and all of your debt combined. On this end, your DTI should be no higher than 36%. And it’s here where getting a mortgage with student loans can become tricky.

Explore your options

Fortunately, there are several steps you can take to try and mitigate any issues. For starters, you may…

Enroll in an income-based payment plan

If you’re attempting to juggle a student loan and mortgage, you might want to look into income-based payment plans. Individuals enrolled in such plans are able to make monthly payments that are more closely aligned with their paycheck — sometimes as low as 10-15% of their earnings. As a result, you’ll have additional funds available and can easily apply the extra money to your mortgage.

Pay down your other debts

Looking beyond your student loans, you can also boost your DTI if you pay down your credit cards and eliminate other outstanding bills. The faster you can pay those off, the sooner you can start putting money towards a mortgage. Just as critical, this can improve your credit score as well. And, of course, receiving a raise or earning additional income will always help!

Consolidate your loans

If you’re feeling overwhelmed by the mere idea of having multiple debt streams, you can also consider consolidation. Specifically, you may choose to leverage your loans by rolling your student debt into your mortgage – also known as “debt reshuffling”. What does that mean? Well, in essence, you’d be using your mortgage to pay off your college loans. This reshuffle can definitely feel like you’re making progress. And you might even be able to reduce the amount of interest you pay (given that student loans often have higher rates). 

However, don’t get too excited. While this sounds appealing, you shouldn’t automatically jump at the opportunity. After all, you’re not actually making strides in paying off your debt. You are simply shifting the burden. In doing so, you’ll be losing some of the equity you’ve put into your home.

Moreover, you will no longer be eligible for loan forgiveness. Nor will you be able to defer payment should you be let go from your job. Ultimately, you need to carefully crunch the numbers to ensure this is the right move. And, when in doubt, consult a trusted professional

Get down payment assistance

Your ability to qualify for a mortgage will also be affected by the size of your down payment. Generally, buyers are in good shape if they can put down 20% or more of the total cost (regardless of college debts). Of course, there’s no question that student loans make it difficult to save.

If you’re having trouble, you might look into assistance programs. These range from providing grants and matching funds to second mortgages. Additionally, agencies like the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) offer special loan programs to some first-time buyers. While the rules and stipulations vary, nearly all require a decent credit score. 

Refinance your student loans

One way to improve your DTI is by refinancing your student loans. It’s important to preface that this can be a risky or complicated decision. For example, if you have government student loans, know that if you refinance through private lenders, you will forgo some protections only available to non-private student loan holders. This is sometimes done through private lenders and often allows you to find lower interest rates. Another possibility is to extend the life of your loan. In turn, the individual payments you make will be smaller. Either option could lower your monthly bill and leave you with more cash on hand to put towards a mortgage.

Dealing with college debt can be daunting. And many people erroneously assume that it prohibits you from moving forward and taking next steps. Thankfully, that’s not the case. If you’re smart with your finances and understand the programs available, getting a mortgage with student loans is definitely achievable.

Buying a home is a huge decision, especially when you have student debt involved. When you’re making a big financial choice in life, it always helps to have professional advice. My Financial Counsel offers matching with fiduciary advisors who have your best interests at heart. You can take a quick and easy questionnaire here.

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