How to buy a house when you have student loan debt
You went to college, maybe even graduated school, and got a job. You’ve been steadily employed since then and are bringing home a decent paycheck.
A generation or two ago, the next step would likely have been to settle down and buy your first home.
But now? That path may not be a sure thing. According to a 2017 survey from the National Association of Realtors (NAR), 80 percent of millennials don’t own a home.
“Of those who don’t own a home, 83 percent of those say that student loan debt is holding them back from purchasing a home,” says Jessica Lautz, managing director of survey research and communications for NAR.
Part of the issue is that student loan debt will count against your debt to income ratio, which is the percentage of monthly income spent on debts like mortgages, credit cards, student loans or auto loans.
A high debt load relative to your income can make you less appealing to a lender and, in turn, less likely to get approved for a mortgage loan.
You can still get a mortgage
If you’re mired in student debt, that doesn’t mean you can’t get a mortgage. You just have to be aware of your options.
Improving your financial profile is one key step to getting there.
“One of the big things you can do is pay off some other debts,” says Dave Mele.
Paying down that high-interest credit card balance, for example, is a great place to start, Mele says.
Or, if you don’t have the cash to pay down a big chunk of your debt, consider refinancing your other loans to reduce the amount you have to pay every month.
“It’s important for would-be homeowners to remember that we look at your monthly debt commitments, not the total amount of debt outstanding, so if you can reduce the monthly amount you have to pay to cover your debt commitments through refinancing your loans or paying off a credit card or two, this can help,” says John Moffatt, head of loan originations at Better Mortgage.
Consider government help
If you have federal student loans, you may want to explore an income driven repayment plan. With this option, your monthly payments can be reduced to a percentage of your discretionary income. This can be a huge help for those whose income is swallowed by high loan payments.
Lower monthly student loan payments can help improve that all-important debt to income ratio.
In April 2017, Fannie Mae introduced three new policies aimed at helping homeownership become more attainable for those with student debt. The policies are:
- Student Loan Cash-Out Refinance: Offers homeowners the flexibility to pay off high-interest student debt while potentially refinancing to a lower mortgage rate.
- Debt Paid by Others: Excludes from the borrower’s debt-to-income ratio non-mortgage debt, such as credit cards, auto loans and student loans, paid by someone else.
- Student Debt Payment Calculation: Allows lenders to accept student loan payment information on credit reports, making it more likely for borrowers with student loan debt to qualify for a mortgage.
If the government options don’t fit your needs, look to refinance your student loan through a private lender. You might find a better rate than what you’re currently paying.
Or, turn to a mortgage lender that considers non-traditional payment sources when calculating your overall profile. Some of today's mortgage lenders will even allow for higher debt-to-income ratios than average depending on the applicant’s circumstances.
NAR’s Lautz also suggests a pragmatic approach for those with student loans looking to boost their chances at homeownership.
“Sometimes they’re delayed in purchasing that home as it may take a little more time to save. Or they sometimes have to make compromises on the location or look at a home that could be a fixer-upper,” Lautz says.