Buying a home is a huge step in your adult life and one of the milestones that help define the coveted American Dream. There are a lot of factors that affect property prices which might make them favorable for you right now, but what happens if you have your student loans still hanging above your head.
If you’re seriously considering getting your own place, let’s talk about it – can you buy a house with student loan debt? The short answer is YES!
Existing debt will affect your ability to get a mortgage
Unless you already have all of the money that you need to buy the property you want, you’re going to need a mortgage. Mortgage lenders will qualify you for a loan by evaluating your financial fitness and profile, and make a determination on whether or not you can manage monthly mortgage repayments.
To do this, they will take a look at (among other things) your income and your existing monthly payment obligations - anything from gym memberships to auto loans to credit card debt, and yes, even student loans. What matters isn’t the fact that you have student loans, but how well you are managing your current monthly payments, and whwther or not there is room for you to add and satisfactorily handle mortgage payments on top of that.
Additionally, adding a hypothetical mortgage payment onto your monthly bills will affect your debt-to-income ratio (DTI) and overall credit score. So technically speaking, having student loans doesn’t automatically mean that you can’t get a mortgage and buy a house; it really just depends on your unique situation, credit rating and your DTI.
How to qualify
To qualify for a mortgage with student loans, you may need to meet the following criteria:
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Stable income: Lenders want to see that you have a stable and sufficient source of income to repay your mortgage and student loan debts.
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Credit score: A good credit score (generally above 620) helps demonstrate your ability to manage debt.
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Debt-to-income ratio: Lenders look at your debt-to-income (DTI) ratio to determine your ability to repay the mortgage. Your DTI should be below 43% to qualify for most loans.
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Status of your student loans: If your student loans are in deferment or forbearance, they may not be factored into your DTI ratio, which could make it easier to qualify. If they are in repayment, they will be counted as part of your monthly debts.
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Down payment: A larger down payment can lower your DTI ratio and make it easier to qualify for a mortgage.
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Loan type: Different loan types, such as FHA or conventional, may have different requirements for borrowers with student loans.
As an example, ff you can’t qualify for a conventional loan, then you might consider an FHA loan. It’s backed by the Federal Housing Administration. In most cases, the max DTI ratio to qualify for one is 57%. If you’ve served in the National Guard or armed forces, you could qualify for a VA loan, where the max DTI ratio is 60%.
How to calculate DTI
The debt-to-income (DTI) ratio is calculated by dividing total monthly debt payments by total gross monthly income. The formula is:
DTI = (Total Monthly Debt Payments) / (Total Gross Monthly Income)
Here, total monthly debt payments include all recurring monthly payments like mortgage or rent, credit card payments, car loans, student loans, etc. Total gross monthly income is the amount of money earned in a month before taxes and other deductions. The result is usually expressed as a percentage. A lower DTI ratio indicates a healthier financial situation, while a higher DTI ratio may indicate higher financial stress and difficulty in making debt payments.
Other factors to consider
There is also the need to consider your financial situation as a whole. Before making the jump to own a house, ensure that you have an emergency fund (3 months-worth of expenses) and enough money left over after deducting monthly expenses and obligations to afford a mortgage.
The bottom line
Yes, you can buy a house with outstanding student loans, but it may impact your eligibility for a mortgage and the amount you can borrow. Lenders will evaluate your income, credit rating, DTI, the status of your student loans, the amount of down payment you can come up with, and whether or not you qualify for any programs with particular incentives or benefits for buyers with your financial profile.
Student loan doesn’t necessarily mean that you can’t buy a home. If you’re ready for your own place, the next step is to contact one of our loan advisors for a free consultation to explore how Jersey Mortgage can help make yoyur dream of homeownership come true.
