How To Get A Mortgage With Student Loans
Set on buying a home even though you have student loans? Here are a few ways to improve your chances of qualifying:
Consider All Loan Types
While you may be tempted to pick the first mortgage your lender offers, comparing different financing options may be more advantageous.
Conventional Mortgages
Conventional mortgages follow guidelines set by Fannie Mae and Freddie Mac, which standardize mortgage lending in the U.S. This type of mortgage requires a minimum down payment of 3% and a minimum credit score of 620. The loan has competitive interest rates and a variety of loan terms.
You’ll likely not qualify for a conventional loan if your DTI ratio is over 50%.
Government Loans
If you can’t qualify for a conventional loan, you may be able to buy a home with a government-backed loan. Because the federal government insures these loans, lenders are more willing to qualify borrowers who likely wouldn’t qualify for a conventional loan due to lower credit scores, smaller savings or high DTI ratios.
You may consider applying for an FHA loan. The Federal Housing Administration backs this popular option and may accept a maximum DTI ratio of up to 57%.
If you served in the armed forces or National Guard and meet the service requirements or are the surviving spouse of an eligible veteran, you may qualify for a Department of Veterans Affairs (VA) loan. With a VA loan, you can buy a home with a DTI ratio of up to 60% in some cases.
Pay Down Your Debt
If your DTI is too high for a mortgage, the fastest way to lower it is by paying off debt, which eliminates ongoing expenses and frees up more cash flow. Consider paying off another debt if you can’t afford to make extra payments on your student loans. For example, if you manage to pay off your credit card debt, you’ll see an almost immediate drop in your DTI ratio.
Increase Your Income
You can also lower your DTI ratio by increasing your income. That may look like working a few more hours at your job or securing a side hustle. Keep in mind that the extra income will only count toward your DTI ratio if you can prove it’s a steady source of cash. Most lenders will require at least 2 years’ worth of proof of income.
Apply With A Co-Borrower
Another way to drop your DTI ratio and increase your income is by adding a co-borrower to your mortgage. When a lender assesses your finances, they’ll include your co-borrower’s income and debts. So, if someone else is on your mortgage application, make sure their DTI ratio is better than yours and can boost your chances of approval.
Buy A Starter Home
In some cases, lenders can be flexible with eligibility requirements. If you purchase a smaller, more affordable starter home, you can make a larger down payment to keep your monthly mortgage payment within a reasonable range.
Should You Pay Off Your Student Loans Before Buying A House?
This question is an important one to contemplate before you buy a house. Consider your debt-to-income ratio, how much savings you have and your current student loan repayment plan.
Let’s walk through the steps to answer this question confidently.
Calculate Your Debt-To-Income Ratio
Before you decide to pay off your student loans or apply for a mortgage, calculate your DTI ratio. Thankfully, the calculations are straightforward.
First, add up all your recurring monthly payments. Remember, you should only include your minimum monthly payment amounts. For example, if you have $20,000 in student loan debt and your minimum monthly payment is $100, only include $100 in your DTI ratio calculation.
After you’ve totaled your debt payments, divide the number by your gross monthly income. If someone else is applying for a mortgage loan with you, you’ll need to add their monthly debt and gross monthly income to the calculation, too.
After dividing total monthly debt payments by gross monthly income, multiply the number you get by 100 to express your DTI ratio as a percentage. If your DTI is more than 50%, you could consider a government backed loan such as FHA - or work on paying down your student loans before trying to buy a home.
Evaluate Your Savings
Next, look at other areas of your finances before considering homeownership. If your DTI ratio is good, but you don’t have an emergency fund, you may want to pause your home buying journey to build up your savings.
And bear in mind that most mortgages require a down payment to purchase a home. You’ll need to save money to make this lump-sum payment. The down payment is a critical part of your overall home buying budget.
Revisit The Terms Of Your Student Loans
If your student loans have high interest rates, your loans will cost more over time. Paying down more of your higher-interest loans before you invest in a home can help you save money on interest in the long run.
Revisit the terms of your student loan repayment plan and compare your monthly payments to your accruing interest. If your payments are low but don’t cover the interest you accrue every month, you’re sliding deeper into debt. In a situation like this, one approach may be to pay more than your minimum and focus on paying off your student loans before taking on mortgage debt.
Also, keep in mind that even loans in deferment or forbearance can be calculated into your debt. Your lender will still look at these loans as if there is a required a payment. If you’re on an income based repayment plan, you should discuss it with your lender to determine how this would impact your DTI.
