Do Student Loans Affect Buying a House?

Cardinal Financial February 20, 2023 | 7 min read
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If you’re sick of substantial rent bumps, or thinking about adding a few new family members (fur babies included), you may be exploring the idea of purchasing a home. That said, for many buyers, there exists one major roadblock: student loan debt, something more than 43 million Americans are dealing with right now. 

Before you back out of home buying, consider this: it’s still very possible to purchase if you’re saddled with student loans.

Can you buy a home with student loans?

No, you cannot buy a home with student loans (ha), but you can buy a home even if you’ve got student loan debt. The home buying process may be more challenging and might take some additional planning, but it could also be a super smart move for “adulting.”

When it comes to applying for a mortgage, lenders consider three things:

  1. Your debt-to-income ratio, or your income compared to your debt load.
  2. Your credit history, including your credit score, payment history, and number of accounts.
  3. Your down payment amount, or how much cash you can dedicate to the mortgage right now.

Student loans have an impact on all three, but not all effects are negative. In fact, some are actually positive, so let’s take a closer look at each.

Your student loans and your home loan payment

One of the first things a lender will look at is how your monthly income compares to your monthly debts. This is called your debt-to-income ratio, or DTI. Your DTI shows the lender what percent of your pre-tax income is spent on debt payments. Shocker: student loan payments factor into that equation, as do car payments, credit card payments, and other regular loan payments. 

Pro-tip: Federal student loan payments are currently paused until June 30, 2023, pending litigation regarding the administration’s implementation of the student loan forgiveness program. That said, although you may not have to repay those loans right now, lenders will still likely use 1% of your student loan balance when determining your DTI.

Many mortgage lenders look for a DTI that’s 40% or lower, and that figure includes your future mortgage payment. That means, once you have a home loan in hand, you’ll need to spend 40% or less of your income to repay debt. This will be your basic benchmark when figuring out how much you might be able to afford, but it’s not a hard cut-off point. Some loan types may allow for a higher DTI, but it’s recommended you stay under it if at all possible. 

Crunch the numbers

Okay, let’s say you earn $4,000 per 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: 1600 – 200 – 200 – 100 = 1100

Alternatively, you could multiply your monthly income by 0.4 and subtract your monthly student loan payments, car payments, credit card payments, etc. Whatever’s left can provide a reasonable estimate of your future maximum mortgage payment—or PITI, which stands for “principal, interest, 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.
  • Want to run the numbers on easy mode? Check out our affordability calculator to compare different price points with your DTI.

Repaying your student loans may mean you have less to spend on a mortgage payment, but that doesn’t mean you can’t have your home and pay it, too. Working with the right lender can help you find a loan that fits your budget and the lifestyle you want to live.

Repaying your student loans may mean you have less to spend on a mortgage payment, but that doesn’t mean you can’t have your home and pay it, too.

What about your credit?

If you’ve determined that your student loan payments aren’t going to be a detriment to your DTI, it’s time to think about your credit. Not just your score, but your holistic report as well.

Student loans, when paid on time, reflect positive credit history. They can actually help improve your credit over time, because they’re long-term accounts that lengthen your credit age. An older credit age is another positive element, and when used appropriately, having credit cards, student loans, and a car payment can help diversify your credit mix. Diverse credit types reflect the ability to handle different types and amounts of debt. 

That said, it’s important to remember that loans are only good if you pay them on time each month. That may not be possible for everyone, but it shouldn’t be a cause for concern. There are debt relief programs you can take advantage of, and credit can change over time. If your credit report is keeping you from buying now, use this time as an opportunity to save and rebuild.  

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 the notion that you need to have 20% down to buy a house isn’t always the case. In fact, you 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.

However, it should be noted that lower down payments come with strings. Not for control, but for security. Private mortgage insurance or a mortgage insurance premium are two common terms that come up with loans that require lower down payments.

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.

If you qualify, you may be eligible for a first-time buyer grant, which can help cover down payments or closing costs…or both! 

Student loans and home equity

So, do student loans impact your ability to buy a house? Absolutely, but homeownership can still be an attainable goal. 

Whether you rent or own, you’re going to have housing costs either way. Those payments could go toward your home’s equity to help you build wealth over time, or they can go toward paying someone else’s mortgage. 

And hey, college grad…homeowner…wealth-builder. Sounds like a pretty sweet life, huh?

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