How to Buy When You Still Have Student Loan Debt
Millennials looking to purchase their first house are faced with a challenge unique to their generation
Other generations borrowed to go to college, but the rising cost of school has saddled millennials with an unprecedented level of debt. According to the Federal Reserve, student loans totaled $240 billion in 2003; by the end of 2019, that number reached $1.51 trillion. In 2003, student loans were 3.3 percent of total household debt; in 2019, it was 10.7 percent.
While student loans will indeed be a barrier to getting a mortgage, they don’t have to prevent you from qualifying for a loan or from getting a good rate. Like much of what lenders evaluate in your application, student loans are just a piece of the puzzle.
While student loans will indeed be a barrier to getting a mortgage, they don’t have to prevent you from qualifying for a loan
Student loans factor into what is called your debt-to-income (DTI) ratio. Your DTI is your monthly debt (loan payments on things like your car, credit cards, and student loans) divided by your monthly gross income (your pre-tax income before any expenses are taken out, which you can usually find on your pay stub).
Lenders calculate this ratio twice—once without your mortgage (front-end) and once with it (back-end). Lenders generally won’t extend a mortgage to someone who has a front-end DTI of more than 28 percent or a back-end DTI of more than 36 percent. If you’re on the wrong side of those numbers, all is not lost; there are steps you can take to help.
Your best move: Pay your debt down
If your debt relative to your income is too high, there’s a straightforward way to alleviate that: Pay down the debt. Start with consumer credit card debt, of course. If you’re debt-free other than your student loans and you’ve been saving up for a down payment, it might make sense to put that toward your loans instead of your future-home nest egg.
…or lower your price range.
Lowering your purchase price (and therefore loan size) will improve your DTI and may make the difference between qualifying for a mortgage and not.
A possible strategy: Refinance your debt
Refinancing your loans or consolidating them with other debt, such as auto loans or credit card debt, could help get your monthly payment down and thus improve your DTI. There are caveats to this, however.Advertisement
If you have federal student loans, you can only refinance them with a private lender, and if you move your loans to a private lender, you forfeit options that can help you over the long haul. For example, you would no longer be able to claim federal loan forgiveness if you work in public service or for a nonprofit. You also likely wouldn’t be able to find a private lender who would put you on an income-driven repayment (IDR) plan (see more on that below). Federal loans can sometimes be temporarily deferred or put on an interest-free payment plan if you run into financial trouble. (Note: Deferring your student loans wouldn’t remove them from your DTI calculation).
If your loans are already with a private lender, it’s worth doing some shopping online to see if you can find a better rate. Because if you’re on the edge of qualifying for a mortgage, it could be determining whether or no you are approved.