Can You Buy a House If You Have Student Loans?

Buying a house with student loans is possible, but depends on several financial factors. Lenders consider student loans when evaluating a mortgage application, alongside your credit score and ability to manage repayment obligations.

Understanding How Student Loans Impact Mortgage Eligibility

Lenders assess your financial capacity by examining your debt-to-income (DTI) ratio. This ratio compares your total monthly debt payments, including student loans, to your gross monthly income. A higher DTI ratio can affect mortgage eligibility or limit the amount you can borrow.

The method for calculating student loan payments for DTI varies by loan status. If you are actively making payments, lenders typically use the amount reported on your credit report. If loans are in deferment, forbearance, or an income-driven repayment (IDR) plan with a $0 monthly payment, lenders may use a different calculation. This estimated payment, often a percentage of your outstanding loan balance, can result in a higher DTI ratio than your actual payment.

Your student loan payment history also influences your credit score, a significant factor in mortgage approval. On-time payments contribute positively, while missed payments or defaulting negatively impact your score and ability to secure a mortgage.

Specific Mortgage Program Rules for Student Loans

Different mortgage programs have distinct guidelines for how student loan debt is factored into DTI calculations. These program-specific rules determine how deferred loans, loans in forbearance, or those under Income-Driven Repayment (IDR) plans are treated.

Conventional Loans

For Conventional loans, student loan debt is typically included in the DTI ratio. Fannie Mae guidelines use the monthly payment shown on your credit report. If a $0 payment is shown, Fannie Mae may calculate a payment equal to 1% of your outstanding loan balance. Freddie Mac’s guidelines are similar, allowing lenders to factor in 0.5% of your student loan balance if loans are in forbearance, deferred, or have a documented $0 payment.

Federal Housing Administration (FHA) Loans

Federal Housing Administration (FHA) loans also consider student loans in the DTI calculation. FHA lenders prefer a DTI ratio of 43% or lower. If student loans are in forbearance, deferred, or on an IDR plan with a $0 payment, FHA guidelines require lenders to use 0.5% of the remaining student loan balance as the monthly payment. If an actual payment is being made, that amount is used.

Department of Veterans Affairs (VA) Loans

For Department of Veterans Affairs (VA) loans, student loan payments typically count against the DTI ratio. The VA’s preferred DTI ratio is generally 41% or lower. If student loans are deferred for at least 12 months beyond the closing date and not due to financial hardship, they generally do not count towards the DTI. Otherwise, they usually count. Lenders may count either the payment amount shown on the credit report or 5% of the overall loan balance divided by 12 months, using the greater of the two.

United States Department of Agriculture (USDA) Loans

United States Department of Agriculture (USDA) loans also include student loans in DTI calculations. USDA loans generally have a maximum DTI of 41%. If fixed monthly payments are made, the amount on the credit report or student loan statement is used. For deferred loans, loans in forbearance, or those on income-based repayment plans, lenders are required to factor in 0.5% of the remaining student loan balance, or the current payment if it is explicitly stated in the repayment plan.

Preparing Your Finances for a Home Purchase

Preparing your finances before applying for a mortgage can significantly strengthen your position, especially with student loan debt.

Improve Your Debt-to-Income Ratio

Improve your debt-to-income ratio by paying down existing debts, particularly high-interest credit cards and personal loans. This lowers your monthly obligations. Increasing your income through overtime or a side hustle can also positively impact your DTI ratio.

Boost Your Credit Score

Boost your credit score by making all payments on time. Reducing high credit card balances to keep your credit utilization ratio below 30% can also improve your score. Regularly checking your credit reports for errors helps maintain an accurate credit profile.

Save for Down Payment and Closing Costs

Saving for a down payment and closing costs is essential. A larger down payment, typically 20% of the home’s purchase price, can lead to lower monthly mortgage payments and may help avoid private mortgage insurance (PMI). Closing costs, ranging from 2% to 5% of the purchase price, include various fees paid at closing.

Obtain Mortgage Pre-Approval

Obtaining a mortgage pre-approval provides a clear understanding of your borrowing capacity. Lenders examine your income, assets, and debts, including student loans, to determine how much you can afford. This step helps identify potential issues early and allows you to address them before making an offer.