Student loans are not necessarily an obstacle to homeownership, but your payments will be taken into consideration when you apply for a mortgage.
The decision of a lender to offer you financing when you apply for a mortgage is based on a variety of factors that are used to evaluate your likelihood to repay the loan. While your credit score, income, assets and job history are all elements of your credit profile, lenders must also check that your debt-to-income ratio falls within their loan programs’ guidelines.
Student Loan Repayment
If you have student loans and want to buy a home, you will need to be vigilant about making your loan payments on time. A delinquency on a student loan will not only damage your credit score, it could also stop you from qualifying for a home loan. This is particularly true if you have a government-backed student loan and apply for a loan from the Federal Housing Administration, Veterans Affairs, or the U.S. Department of Agriculture Rural Development, because your lender will check the federal Credit Alert Verification Reporting System database to make sure you are not in default on any government obligations.
If you can consolidate your student loans or refinance them into a longer repayment term, you may be able to reduce the size of your monthly payments, which will make it easier to qualify for a mortgage. Better yet, pay off your student loan as quickly as possible by reducing other expenses and paying more than the minimum payment.
Mortgage Qualifications and Student Loans
Many young people lack a long credit history, so on-time student loan payments can actually add to a positive credit report. On the other hand, student loan payments are part of the debt-to-income ratio, which compares all recurring minimum monthly payments to your gross income. Most lenders require a maximum debt-to-income ratio of 43%, although FHA lenders are sometimes a little more flexible if you have compensating factors such as a high credit score, a solid job history or additional assets in the bank. For example, if your monthly income is $4,000 and you have a monthly student loan payment of $400, your other monthly bills, including a car payment, credit card payment and mortgage payment including principal, interest, property taxes, homeowners insurance and a condo or homeowners association fee must be less than $1,320 to stay within the 43% debt-to-income ratio.
If your ratio is too high, you will either have to reduce your debt or increase your income or, ideally, do both. It may be possible to pay off your credit card debt or your car loan or negotiate with your student loan provider for a lower monthly payment. Remember, though, that if you reduce your loan payment, you will be paying more in interest over the life of the loan.
Other options to consider include bringing in a co-signer on your home loan or finding a way to make a bigger down payment to reduce the amount of money you need to borrow to finance your home.