Can I Get a Mortgage With Student Loan Debt?
The short answer is yes, you can have a mortgage and student loan debt simultaneously. As with any other loan, your ability to qualify is based on your credit score and ability to repay the loan.
Having student loans debt alone doesn’t necessarily lower your credit score. However, one of the key thing’s lenders do look at is your DTI or debt to income ratio. Having student loan debt can raise your DTI, in turn making it harder to get approved.
You also need to factor in your student loan payment each month when looking at your potential mortgage payment.
How Student Loans Are Calculated In Your DTI Ratio
Student loan debt is usually taken into consideration when assessing your credit worthiness as a borrower. Your DTI is calculated by dividing your monthly debt payments by your monthly gross income. This yields a percentage value used by lenders to determine your ability to repay a mortgage.
For example, if you were to have a personal loan as well as student loan payments, this would be added to the proposed mortgage payment and divided by your total gross monthly income. Lenders may require a DTI lower than 43 or even 36 percent while others allow up to 50 percent.
Your DTI is one of many factors that play a part in the approval process and there are often additional factors such as credit score, that may compensate for a higher DTI when it comes to getting approved. You may be able to switch into an income driven repayment plan to lower your DTI. It may also be advantageous to shop between lenders to see who can best help in your situation.
What Guidelines Will I Need to Worry About?
Fannie Mae
With Fannie Mae conventional loans, your student loan debt is likely to be included in the DTI ratio. Many of these loans are conforming loans which means they adhere to Fanni Mae standards. If your credit report specifically lists your monthly payment amount, your lender can use that amount in the underwriting process, per the Fannie Mae guidelines.
If your credit report either shows an incorrect amount or doesn’t include your payments, the lender can factor them in by reviewing your latest student loan statement instead. This is also the case if you’re on an income driven repayment plan.
If your student loans are either in forbearance or deferred, your lender can factor in either 1% of your remaining student loan balance, or one payment based on your student loan repayment terms.
Freddie Mac
Freddie Mac and Fannie Mae have similar guidelines apart from one key difference. If your loans are in forbearance or deferred or the payment is otherwise documented as $0, your lender may factor in just 0.5 percent of your student loan balance.
If you have 10 months or less left on your repayment plan, your lender can opt to not include your student loans at all when calculating your DTI ratio. (This may also be true for other types of debt such as auto loans)
This also may come into play if your student loans are set to be forgiven entirely. In either situation, you’ll need to prove this with student loan statements.
Federal Housing Administration
Same as with a conventional loan, FHA mortgage guidelines advise that student loans will be considered into your debt obligations. Your lender will strictly calculate the monthly payment based on your credit report or student loan statement.
If your student loans are in forbearance on deferred, or if you’re on an income driven repayment plan, the lender is required to factor in either: 0.5 percent of the remaining student loan balance if your current monthly payment is $0; the actual payment indicated in your student loan statement; or the monthly payment listed on your credit report.
Should I pay off my student loans before buying a house?
While you can have both student loans and a mortgage, there are sine situations when paying off your student loan debt first may be a better option. For example, if your student loans have a higher interest rate you may want to focus the extra money toward paying them off. Also, if you’re looking for a home in a more expensive area, having a lower DTI can help you afford a higher housing payment.
In Conclusion
Although it may prove to be a more difficult process, it is still possible to get approved for a mortgage with student loan debt. Other factors such as your credit score and overall DTI play key roles in the approval process. In the end, it boils down to your ability to repay the loan with or without additional debt.