It's entirely possible to get a home loan while carrying student loan debt, so long as you still meet the lender’s criteria. However, having student loan debt can make buying a home more difficult, as lenders will review your financial situation, including how your debt compares to your income, to ensure you can repay your loan.
Key Takeaways
- Student loan debt impacts your debt-to-income (DTI) ratio, which lenders use to evaluate you as a borrower.
- The more debt you have, the lower your credit score, and lenders use your credit score to assess risk.
- Some types of home loans have lower DTI requirements and lower down payment requirements.
How Student Loan Debt Impacts Your Eligibility for a Home Loan
Carrying student loan debt generally makes qualifying for a home loan more difficult for several reasons. First, student loan debt increases your debt-to-income (DTI) ratio, which lenders use to assess your risk as a borrower.
Your DTI is essentially the proportion of debt payments you have each month compared to your monthly income. Many lenders require DTI ratios that are 36% or less, but some lenders have higher maximums. The higher your DTI ratio, the more difficult it will be to get approved for a home loan.
Your credit score is based on several factors, including your payment history, credit utilization ratio, credit mix, the amount of new credit you've recently taken out, and the length of your credit history. Managing on-time payments on your student loan debt for a few years will demonstrate your creditworthiness, which can benefit your credit score.
However, having student debt can also negatively impact your score. For instance, if you’ve ever made late payments on your student loans or missed payments entirely, your credit score likely declined as a result. If your loans went into default, your score may have also taken a hit. It can take several years for your credit score to rebound from a default. Student debt also lowers your credit utilization ratio by increasing your debt.
The less student debt you have in relation to how much you earn, the easier it will be to qualify for a home loan and get better rates. If your student debt has spiraled out of control, then working with one of the best credit counseling services may be able to help you get back on track.
Difference Between a Home Loan and a Mortgage
The terms "home loan" and "mortgage" are frequently used synonymously, but they aren't technically the same thing. A mortgage is a type of loan that's secured by the property it's taken out for. Meanwhile, a home loan is typically a mortgage used to buy a house.
However, a home loan can also describe any kind of debt that's used to purchase a home. This includes unsecured personal loans as well as home loans that are secured by a different kind of asset. The main benefit of these types of home loans is that a borrower isn't at risk of their home being foreclosed on should they default. The ways in which student loan debt affects buying a home are more or less the same regardless of the type of home loan you opt to take out.
You should keep in mind that unsecured home loans will likely have much higher interest rates than their secured counterparts. Additionally, it may be difficult to find an offer for the amount of funding needed to purchase a home without using a mortgage.
If you have a sufficient amount of cash, you don't have to use a home loan to purchase a house and can instead buy one outright. This would save you the most money in the long run, as you won't be paying interest on your debt, but if you're repaying your student loans, this can make it harder to save for such a large purchase.
Best Home Loans for Borrowers With Student Loan Debt
If you have student loans and are worried about qualifying for a home loan, you should shop around for different loan options.
Conventional loans, the most common home loan type, are private loans that come from banks, credit unions, and online lenders. Home loans backed by the federal government include Federal Housing Administration (FHA) loans, VA loans, and USDA home loans.
| Type of Loan | Interest Rates* | Loan Terms | DTI Required | Down Payment | Credit Requirement |
| Conventional | Up to 6.78% for fixed rates | 10 to 30 years | Typically less than 36% | As low as 3% | Typically 620 |
| FHA | 6.04% or 6.58% for fixed rate | 15 or 30 years | Less than 43% | As low as 3.5% | 580 for 3.5% down, 500 for 10% down |
| VA | 6.09% for fixed rate | 30 years | 41% | N/A | N/A |
| USDA | 4.875% | 33 years, 38 years for very low income applicants | 41% | N/A | Varies |
(*As of July 2024. FHA and VA rates based on on latest Zillow data.)
Tips for Getting a Home Loan With Student Loan Debt
Lenders and loan types vary with the terms they offer, so compare different home loan offerings to find the one that best suits your needs.
Document Your Student Loan Debt
Be direct and honest with your potential lender when you fill out your home loan application. Lenders will have access to your financial documents and accounts, and they will verify your information with a hard credit check. If you can, provide any details and documents related to your student loan debt, including recent payments, lender information, and tax returns to show your previous loan payments and any paid-off debt you may have.
Work With Home Loan Providers
Talking with a home loan provider about your situation and needs can help you determine which type of loan would fit your situation. By doing so, you may decide that you need more time to pay off your student loan debt before getting a home loan. Alternatively, you might realize you are financially ready to buy a home even with your student debt.
If you decide to go with a mortgage, then the right one for you will depend on your circ*mstances. For instance, you might qualify for a VA loan, which doesn’t require a down payment or a minimum credit score, or you might find that your DTI is too high to get a VA loan, so a conventional loan may be a better fit.
Take Charge of Your Student Debt Now
As you'll have to manage both your student loan and home loan repayments at the same time, it may be a good idea to make the former easier to manage before applying for the latter. You might be able to reduce your monthly payments by consolidating, refinancing, or enrolling in a different repayment plan. For example, you may qualify for an income-driven repayment (IDR) plan for your federal student loans (private student loans won't have this option). This type of plan calculates your monthly payments based on a portion of your income and household size. Enrolling in this type of plan may free up some cash that could be put toward repaying a home loan, which would make you a more appealing applicant to a lender.
Does Student Debt Affect My Credit Score?
Your student loan debt can impact your credit score in several ways. The more debt you carry, the lower your credit score. If you miss a payment or default, your score could also suffer. However, making on-time payments on your student debt can help improve your credit, as it shows you’re responsible with credit.
What’s an Ideal DTI Ratio?
Your ideal debt-to-income (DTI) ratio depends on the lender and the type of home loan. Lenders generally like to see a DTI lower than 36%, but some lenders may allow DTI ratios of 43% or even higher. The lower your DTI ratio, the more responsible you look to lenders, and the better your chances of getting approved for a home loan.
Should I Pay Off My Student Loans Before Buying a House?
You can still buy a home while paying off your student loans. However, the more money you have to put towards your home and related costs, the easier it will be to repay your debt and other expenses every month. Paying off your student loans can increase the chances you will qualify for a home loan with the best interest rate.
How Can I Know if I’m Eligible for Loan Forgiveness?
You might be eligible for student loan forgiveness if you’re a teacher or you work for the government or a not-for-profit organization. If you’re been repaying your loans through an IDR plan, you might also qualify if you've made 20 or 25 years of on-time payments. You may want to contact your lender to see if you’re eligible for forgiveness.
Can I Roll My Student Loan Debt Into a New Mortgage?
You might be able to add your student loan debt into a mortgage by refinancing your current home loan, but not by taking out a new mortgage for a new home. However, refinancing to pay off your student loan can come at a cost. You might end up paying more in interest in the long term. If you have federal student loans, you would lose the opportunity to get deferred payments, forbearance, forgiveness, or alternative repayment plans.
The Bottom Line
You can buy a home while carrying student loan debt, depending on your income and current debt obligations. The more debt you hold, however, the more difficult it will be to do so. Review all your options for home loans and calculate how a monthly payment may fit into your budget, considering you'll already be repaying your student loans. In some cases, you may have to pay down some of your debt before you can get approved for a home loan.
Article Sources
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U.S. Department of Agriculture. “Ratio Analysis.”
Freddie Mac. “Mortgage Rates.”
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U.S. Department of Education. “Student Loan Forgiveness.”
