When you’re chipping away at a mountain of student loan debt, buying a house seems like the last logical move to make. That means adding more debt to your stack, right? What’s more, you might think you won’t qualify for a mortgage when you already have a hefty loan in your name. The truth: you can buy a house with student loan debt. The key is to buy only as much “house” as you can afford.
There have been some recent changes to mortgage application processes when it comes to factoring in student loan debt, specifically for FHA loans. Let’s look at all major loan types and how you can prepare to buy a home before you pay off your student loans.
Getting an FHA Loan with Student Loan Debt
The Federal Housing Administration recently updated its policy on the mortgage loan process to make it easier to qualify for a loan with student debt. With this update, lenders are no longer required to factor in 1% of the student loan balance. Rather, the new policy allows lenders to consider the actual monthly student loan payment in its place, which is often lower. This helps buyers meet FHA minimum eligibility requirements, putting homeownership within reach.
Why does this matter? For someone whose student loan debt is minimal and is paying more than the minimum monthly payment, it might not make a difference. But for those who have high student loan balances and can’t pay much more than the minimum, it’s often the one detail that holds them back from getting a mortgage.
Let’s say you have a student loan balance of $50,000. One percent of this balance would be $500, which is what the lender will look at when determining FHA loan eligibility requirements. Now, let’s say your monthly loan payment is only $200. With the new policy, the lender will use the $200 monthly payment when determining your debt-to-income ratio instead of the $500 (1%). This gives you a $300 gap that could be the tipping point for your eligibility.
If you have deferred your loan payments, this new rule helps you even more. Your monthly payments are essentially $0 with deferment, so this gives you even more wiggle room.
Getting a Conventional Loan with Student Loan Debt
Conventional mortgages (such as Fannie Mae and Freddie Mac) include your debt-to-income ratio, which means student loans are a factor. Under Fannie Mae guidelines, lenders can use the amount that appears in your credit report during the underwriting process. If that amount isn’t listed in your credit report, they can factor your loan debt into your DTI ratio. For loans in forbearance or deferment, Fannie Mae factors in 1% of the balance or the payment amount in your student loan repayment terms.
Freddie Mac is similar to Fannie Mae except when it comes to forbearance or deferred loans. Your lender can factor in 0.5% of the outstanding balance instead of the actual payment or 1%.
Getting a VA Loan with Student Loan Debt
Military members, veterans, and their families face different requirements when considering student loan debt. A VA loan requires a DTI ratio of no more than 41%. However, student loan payments do not need to be factored into this ratio if they are to be deferred at least 12 months after your loan closing date.
However, if you expect to be making payments 12 months after closing, your lender will factor in your actual payment amount or 5% of your outstanding balance divided by 12 months, whichever is greater.
Getting a USDA Loan with Student Loan Debt
Similar to a VA loan, USDA loans require a DTI ratio of no more than 41%, with a few exceptions. If you’ve been diligent in making regular payments, this amount will be used in calculating your DTI. For loans that are deferred or in forbearance, the lender will consider 0.5% of your outstanding balance or the current amount on your payment plan.
Other Best Practices for Buying a House with Student Loan Debt
Buying a home with student loan debt isn’t impossible, but it does require some research on your part to see what you can afford and which loan type offers the most favorable terms.
Some other things you can do to increase your chances of getting a mortgage include:
- Increasing your credit score by making timely payments
- Decrease your debt-to-income ratio
- Apply for a mortgage pre-approval before you start home shopping
- Check your credit report for discrepancies
- Seek down payment assistance programs to free up capital, then put it toward student loan debt
If homeownership is your goal, then a little research can make it a reality. Join our Home Buyer Challenge today and start taking the steps you need to buy a home in record time!