Buying a House While Paying Back Student Loans: Is It Possible?

If you’re a college student or recent graduate, the prospect of owning a home in the near future may seem a bit out of reach.

The average student debt in America is $36,150, according to figures from the Education Data Initiative. That number not only exceeds the average down payment for a house, but it’s also complicated by the reality that most graduating students have very little saved up.

These figures can make home ownership feel like a pipe dream for recent graduates, but purchasing a home while paying back student loan debt is certainly possible. We’ll go through some of the eligibility criteria for mortgage approval and how you can make your student loan payments more manageable to start saving for your first home.

Is It Possible to Get a Mortgage If You Have Student Loans?

It’s possible to balance student loan payments and a mortgage. There are several factors to consider, such as your income, your loan amount and other financial obligations, but you don’t have to give up your dream of homeownership while still paying on student loan debts.

Both private and federal student loans need to be accounted for in the mortgage loan application process to determine eligibility for a mortgage. You should also review your monthly payments and total student loan debt to see if you have room in your budget or savings to take on a mortgage.

Once you’ve reviewed the numbers yourself, it’s time to apply to be preapproved for a mortgage. Mortgage lenders use this step to determine whether you’re a qualifying borrower capable of making consistent monthly payments until your mortgage is fully paid.

Top Eligibility Requirements for Buying a Home With Student Loan Debt

Now that you know it’s possible for individuals with student loans to become approved for a mortgage, it’s important to consider the best steps for you personally. Purchasing a house is a major commitment that requires you to reflect on your financial situation and life goals.

Balancing student loans and buying a house requires you to meet various eligibility requirements. These requirements can vary depending on your lender and your current situation:

Eligibility requirements can seem like a wall preventing you from purchasing your new home. Remember that these requirements can also protect you from taking on too much debt and getting into a difficult financial situation.

Each of these requirements not only helps determine whether you qualify for a mortgage but also the interest rate, monthly payment and term of your loan. The most popular length of a mortgage term is 30 years, though you can also apply for other terms.

Your mortgage interest rate depends on a number of things, including your credit history, term length and down payment. A lower interest rate and a short term can both result in less money paid toward your loan throughout its lifetime, but a lower monthly payment and a longer term can help you balance your short-term financial goals and pay off student loan debt.

Low Debt-to-Income Ratio

One important number in your loan application is your debt-to-income (DTI) ratio. This ratio is a quick way to determine whether you have the income available to make consistent monthly payments over the life of your mortgage loan.

While the ratio sounds complicated, the calculation is rather simple. Here’s how your DTI ratio is calculated in general, though these calculations can vary by lender:

The goal is to have a low debt-to-income ratio. This means that, comparatively, you earn a good amount for the amount of debt you owe. Your DTI doesn’t affect your credit history but it can affect the loan application process.

The Consumer Financial Protection Bureau defines a good DTI ratio as one that is 43% or lower. Buying a house with student loan debt is possible if you have a DTI ratio above 43%, but it becomes more difficult. A DTI higher than 50% means you may struggle to pay minimum monthly payments while covering other living expenses.

There are two more commonly noted ways to alter your DTI. First, you can try to earn more income. This will take some time, as lenders want to see a pre-tax monthly income history of more than a few months, and many ask for two years of work history. Starting a part-time job or side hustle now may help you earn some extra cash, but it may not affect your DTI immediately.

Another way to lower your DTI ratio is to pay off your debt. Making a significant payment on your student loan amount, car loans, or credit card debt can reduce your monthly payment amounts. This may be the quickest way to improve your DTI ratio as you prepare to apply for a mortgage. It may even improve your credit score and your monthly mortgage payment options.

Strong Credit Score

A strong credit score may help you receive a lower interest rate, more flexible mortgage terms and a lower monthly payment. While a high score may not overcome a high debt-to-income ratio, it can help improve the application of first-time homebuyers.

What is a strong credit score? Your score is calculated based on a number of factors:

Most credit scores range between 300 and 850. The exact definition of a good score depends on the lender of your mortgage loan. According to Equifax, here are the basic credit score ranges:

Your target credit score depends on your situation and the reason it’s being checked. For a jumbo loan, for example, only scores above 700 are considered good. Loans insured by the Federal Housing Administration may be available with a credit score of 580.

Don’t let a low credit score prevent you from applying for a mortgage. You may, however, want to consider paying down your outstanding student loan balance to potentially improve your chances of being approved or qualifying for a competitive interest rate. Explore ways to increase your gross monthly income or use more of it to increase your student loan monthly payments.

Size of Down Payment

Another factor to consider when paying student loans and buying a house is the size of your down payment. The conventional rule of thumb used to be to save up at least 20% of the loan amount. A higher down payment can lower your monthly payments. This decreases your DTI ratio on the mortgage application and can improve the likelihood of you becoming approved for homeownership.

For most Americans, however, saving up a 20% payment can be a significant challenge. The average down payment size is currently 6% for first-time home buyers, according to the National Association of Realtors. Putting down more money can reduce your monthly payment, but you don’t have to wait until you have a full 20% saved before applying for a loan.

The minimum payment required before securing a mortgage varies depending on your application and loan type. The Federal Housing Administration (FHA) insures loans that are issued by other lenders. An FHA loan only requires a down payment of 3.5%. Other mortgage lenders may prefer you put down at least 10% for a conventional loan.

Consider FHA down payment grants and other federal down payment assistance programs if you need assistance covering the money down on your new home. These grant and loan programs could reduce the minimum requirements or offer additional loans or grants to cover the initial payment.

How To Secure a Mortgage With Student Loans

Whether refinancing or buying a home with student loan debt, you don’t need to fully pay off your debt before you move forward with your financial goals. Here are some ways student loan borrowers can prepare to secure a mortgage without waiting years to pay off debt or save for a house:

Student loans and buying a house can be stressful if you don’t take the time to put your finances in order. Create a budget to see what your monthly expenses look like on top of your monthly debt payment responsibilities. Your DTI ratio doesn’t account for groceries, utility bills and many living expenses that you need to factor into your personal finances before checking out your options for home loans.

Explore Different Types of Home Loans

Buying a house with student loan debt may be possible with the right type of home loan for your personal situation. Here are the most common types of mortgages:

If you have a debt-to-income ratio under 50%, then you may need to consider an alternative lending strategy. FHA loans, for example, can still be competitive options if you have a DTI of up to 57%. VA loans are available with a score of up to 60%.

Reduce Your Debt-to-Income Ratio

Consider your options to pay off debt or save for a house before applying. You don’t need to wait years to become a homeowner, but you could improve your application and your financial situation by lowering your debt-to-income ratio. Look for ways to increase your monthly payments to lenders to pay off your other debts.

Your DTI ratio includes the following monthly payments:

Look for ways to lower, pay off or avoid other debts as you prepare to apply for a mortgage. Paying off even one other debt can make a big difference for your lenders and may even improve your credit report.

Decreasing your debt and increasing your income both directly affect your DTI ratio. Try to avoid major credit card purchases, auto loans and other significant purchases until after you become a homeowner. These investments can negatively affect your DTI and your entire loan application because this ratio is one of the most important factors in your application.

Increase Your Income

One of the more difficult, but most effective, ways to improve your financial situation is to increase your income. It takes determination, but even a few weeks or months of side work might make a difference. An increase in gross income could offer you one or more of the following benefits:

All of these factors could translate into a lower interest rate for your mortgage. You can still apply for a loan even if you have a significant amount of student loan debt provided you have the income to cover it. Take this opportunity to look for side work that can offer you some extra cash. Here are some popular side hustles for college students or recent graduates:

Frequently Asked Questions About Student Loans and Buying a House

Is it a good idea to buy a house with student loan debt?

Whether you should pay off debt or save for a house depends on your personal finances and student loan debt amount. Homeownership could be an option for borrowers who are staying in the home for an extended period of time. Compare your current rent or other living expenses to your proposed future expenses. Be sure to include the mortgage, closing costs, any necessary renovations, utilities, property taxes, and homeowner’s insurance.

How do student loans affect the home-buying process?

The most significant way student loans affect the home-buying process is through your debt-to-income ratio. If your loans cause you to have a DTI ratio over 50%, then it could negatively impact your eligibility for a conventional mortgage. Try to reduce your DTI by increasing your income or paying off debt before applying if your current ratio is over 50%.

How big of a down payment should I save to buy a home with student loans?

The average down payment for first-time home buyers is approximately 6%, according to the National Association of Realtors. Most homeowners put down between 3.5% and 20% for a conventional or FHA loan. A larger down payment could result in lower interest rates and more flexible terms, but you may still be able to secure a mortgage with a lower amount through down payment assistance programs and with private mortgage insurance.

How can I save money on my student loan payments?

Consider student loan refinancing opportunities to potentially save money on student loan payments. Explore your options to see whether you could qualify to receive a new interest rate, lower your monthly student loan payments, and consolidate all of your loans into a single, convenient payment. This approach could not only be more convenient than paying many different student loans but also potentially reduce the amount you pay over the lifetime of your loans.

Learn More About Student Loan Repayment Plans

When paying student loans and exploring buying a house, be sure to review your DTI ratio, consider the available loan types, and look for opportunities to earn more income.

Explore student loan refinancing through Splash today to compare rates from multiple lenders. Combine your dreams of pursuing your education and homeownership with the right financial tools and strategies.