Dealing with student loans can make it challenging to work toward other critical financial goals. According to a 2019 survey by Bankrate, almost a quarter of student loan borrowers have delayed homeownership because of their college debt.
Buying a house with student loans is possible, but there are some things to consider before you start the home-buying process.
Buying a house with student loans isn’t always easy
Do student loans affect buying a house? It depends on the situation. If you’re on the tail end of your student loan repayment plan, your debt may not have much of an impact on your ability to get a mortgage.
But if you’re a recent graduate with an average student loan balance, which has reached $29,650, it’s an entirely different story. Here’s how student loans can affect your chances of getting into a home of your own.
It affects your cash flow
If you have $29,650 in student loans with a weighted-average interest rate of 5%, you’ll have a $314 monthly payment over the federal standard 10-year repayment plan. For many people, that’s enough money to make it difficult to save for a decent down payment on a home, when you factor in other necessary expenses.
If you have federal student loans, getting on an income-driven repayment plan can reduce your monthly payment, but it also extends your repayment term up to 25 years — which means you’ll end up paying a lot more in interest and you’ll be dealing with student loans for the majority of your time in the workforce.
Income-driven repayment plans can be useful if you’re having trouble making ends meet, but think twice about using one just so you can take on more debt for a house.
It increases your debt-to-income ratio
Your debt-to-income ratio, called DTI for short, shows lenders how much of your gross monthly income goes toward debt payments. In most cases, your DTI should be below 43% to qualify for a mortgage loan, and many lenders prefer 36% or lower.
If your student loans push your DTI above those thresholds, you’ll have a hard time getting approved. Even if your DTI meets the requirements, it can still reduce the amount that you qualify for, making it challenging to get the type of home that you want.
The last thing you want to do is buy a home that you can barely afford, only to end up living paycheck to paycheck and have no savings when the furnace breaks or the roof needs to be replaced.
It can affect your credit score
To qualify for a conventional mortgage loan, you typically need a credit score of at least 620, and many mortgage lenders reserve their best terms for borrowers with scores much higher than that.
If you’ve missed a payment on your student loans, it can have a negative impact on your credit score — your payment history is the most influential factor in your FICO credit score.
Even if your credit score is still above the minimum threshold, mortgage lenders will review your credit report and may balk if they see a missed payment. If you’ve had trouble keeping up with debt payments in the past, they take it as a sign that it could happen again.
When buying a home with student loan debt makes sense
Buying a house with student loans can be a good decision, but it’s essential to take the time to understand your financial situation. Look at the type of home you want and get an idea of what it would cost to own it.
In addition to the principal and interest you pay the lender each month, you may also need to include mortgage insurance, homeowners insurance, HOA dues and property taxes, which can vary based on your situation. Use an online mortgage calculator or work with a mortgage broker to get some ballpark numbers.
Once you have these numbers, examine your budget to determine how affordable the payment is. Also, run the numbers on the alternative. In some markets, owning a home can actually be cheaper than renting one, at least in terms of the monthly payment, but you’ll still need to account for maintenance and repairs that a landlord would cover if you were a tenant.
If you can manage to make it work and have some money left over to either save or continue paying down your student loans, buying a house with student loans may be doable. But if you would end up spending more than you earn or have very little room for error, the financial strain likely isn’t worth it.
Tips for making a home more doable with student loans
If you’re not sure whether you’re in the right position to buy a home with your student loan debt, here are some potential solutions to help you get to where you want to be.
Seek down-payment assistance
While a 20% down payment is generally recommended, conventional mortgage lenders may require a down payment as low as 3%. If you’re a first-time homebuyer, some mortgage lenders may even offer a loan with no down payment at all.
But if you’re having a hard time finding even a little money to save toward a down payment each month, some state and local government agencies and nonprofit organizations offer down payment assistance programs.
These programs are designed for low- to-moderate income families and can provide some or all the cash you need to satisfy a lender’s requirements. Depending on the program, the money can be an extra loan or a grant. If it’s the latter, you may need to meet specific requirements to avoid needing to repay the money. Check with your state and local governments to find out if there are assistance options for you.
Also, keep in mind that mortgage loans insured by the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture don’t have any down payment requirements. So, if you’re an eligible member of the military or a family member of someone who is, or if you’re buying a home in an eligible rural area, you may qualify for a loan insured by one of these agencies.
Pay down your debt
If you have tens of thousands of dollars in student loan debt, it could take years to pay it down, even if you add extra cash to your monthly payments. But if you have other debts with lower balances, such as credit cards or an auto loan, paying off those debts can reduce your DTI and improve your cash flow situation.
Paying down credit card debt will also lower your credit utilization rate (your card balances divided by their credit limits) which will also improve your credit score.
Work on your credit
You can’t get rid of a legitimate late payment on your credit report, but you can do things to establish a more positive credit history going forward.
For starters, set a goal to make all your debt payments on time each month, and work on paying down any credit card balances you have.
Avoid taking on new debt unless you absolutely need to. For instance, if you have a car with no payment, consider holding onto it as long as possible rather than replacing it with a newer car (and a shiny new car loan).
Finally, check your credit reports for potential errors. You can get a copy of your report for each of the three major credit bureaus once every 12 months through AnnualCreditReport.com. If you find anything erroneous or fraudulent, contact the creditors and file a dispute with the credit bureaus to try to get it removed.
The bottom line
Can you buy a house with student loans? Absolutely. But depending on your situation, your college debt can act as a roadblock. As you consider your current financial situation, think about what’s best for you and, if applicable, your family. While buying a home can be a significant milestone, it may not be worth it if doing so threatens your financial security.
Take some time to understand your obstacles and research potential solutions. And because the home-buying process can be driven by emotions, try to take a step back now and then to check yourself and make sure you’re making the right decision.
