Does a Student Loan Affect Getting a Mortgage?
Student loan debt can make it harder, but not impossible, for you to get a mortgage. Lenders consider your student loan debt when they assess your mortgage application and may deny you if your debt-to-income (DTI) ratio is too high.
If you fall behind on your student loan payments, the impact on your credit score can be another barrier to homeownership. Paying student loan bills every month can also make it difficult to save for a down payment and closing costs.
However, with a little know-how and the right financial strategy, you can still get a mortgage with student loans still on your plate.
Key takeaways
- Your student loan debt can make it harder to qualify for a mortgage because it affects your DTI ratio and credit score.
- Student loans can also make it tougher to save for a down payment and other homeownership costs.
- It’s still possible to get a mortgage with student loan debt, but you may end up with a higher interest rate due to a higher DTI ratio.
How student loans affect your DTI ratio
Your DTI ratio is a key part of your mortgage application and helps determine how competitive your interest rate offers will be, as well as how large a mortgage you can qualify for.
It includes monthly payments on all your loan obligations, including credit cards, housing payments and auto loans, as well as any other legally obligated payments, such as alimony and child support.
To calculate your DTI ratio, lenders add all your monthly debt obligations and divide the total by your gross monthly income.
For example, let’s say your student loan payments are $500 a month and you also have an auto loan that costs $300 a month. Your gross monthly income is $4,000.
$500 + $300 = $800
$800/$4,000 = 0.20
Your DTI ratio would be 20%.
How do mortgage lenders calculate your monthly student loan payment?
Most lenders use the payment amount reported on your credit report. But if your credit report doesn’t show a payment, they’ll estimate one using your outstanding loan balance.
| Loan type | Maximum DTI ratio allowed | How lenders calculate your monthly payment |
|---|---|---|
| Conventional loan | 45% |
|
| FHA loan | 43% | The payment listed on your credit report or 0.5% of your outstanding loan balance divided by 12 |
| VA loan | 41% | 5% of your outstanding loan balance divided by 12, unless the monthly payment shown on your credit report is higher — in that case, lenders must use the higher payment unless the student loan servicer confirms a lower payment |
| USDA loan | 41% |
|
Exceptions: When a lender doesn’t consider your student loan debt
- When someone else pays your student loan debt: If you can prove that a cosigner covered your entire student loan payments for the past 12 months and there’s no history of delinquent payments, then your student loan debt likely won’t be included in your DTI ratio calculation. This only applies to FHA loans, however.
- When your payments are deferred: If your student loan payments are deferred for at least 12 months beyond your mortgage closing date and you’re applying for a VA loan, they may not be counted in your DTI.
- When your loan has been forgiven, canceled, discharged or paid in full: If you can prove that you no longer have to pay your student loans, they can be excluded from your DTI ratio.
- When you take out a physician loan: It may be easier to get a mortgage if your student loan debt helped you to become a doctor, dentist or veterinarian. Physician loans typically allow 100% financing and don’t require private mortgage insurance (PMI).
What is a good DTI ratio?
The lower your DTI ratio, the better your chances of getting approved and securing a low mortgage interest rate. Lenders may deny your application if your DTI ratio is higher than 41% to 45%, depending on the loan program.
| DTI ratio | How lenders view it |
|---|---|
| 35% or lower | Good: You likely have the financial ability to take on an additional debt payment |
| 36% to 49% | OK: You may struggle to cover your bills if you add another debt payment |
| 50% or higher | Poor: You likely can't afford another debt payment |
How student loans affect your credit score
Late or missed payments: Lose 140 to 160 points
Late or missed student loan payments can have a major impact on your credit score, because payment history is the single largest factor affecting your credit. A late payment can bring your credit score down by 140 to 160 points. And the longer the payment goes unpaid, the larger the impact on your credit score.
Student loan default: Lose 50 to 90 points
If you continue to leave your student loan bill unpaid, you may go into default. Federal student loan debts usually enter default after 270 days of missed payments, but this can vary based on the type of federal student loans and private student loans. Default leaves a stronger negative mark on your credit report than delinquency and can lower your credit score even further, usually by another 50 to 90 points.
How to get a mortgage when you have student loans: 4 strategies
1. Lower your monthly debt load
If you want to improve your DTI ratio, you should focus on reducing your monthly debt payments rather than paying down your entire outstanding principal amount. This means focusing on paying off debts with the highest monthly payments, rather than the ones with the largest principal balances or the highest interest rates.
This strategy may seem counterintuitive, and for good reason — common financial advice recommends that we should attack high-interest debt first. But for mortgage approval, your goal is to improve your DTI ratio. Here are a few strategies you can try to reduce your monthly obligations:
- Alter your student loan repayment plan. Switching from an income-based repayment plan to an income-contingent repayment plan, for example, could lower your monthly payment.
- Consolidate your non-student loan debt. A debt consolidation loan is a personal loan that allows you to combine several smaller debts into a bigger one, but with a lower annual percentage rate (APR), helping you save money and reduce your monthly debt load.
- Refinance your student loans. Lenders offer student loan refinance loans that can help you combine all your student debt into one payment. Your credit score largely determines your interest rate, so refinancing can be a great option if your credit has improved since taking out the loans.
- Refinance your car loan. If you can refinance to a more affordable car loan, or even one with a longer repayment period, it can lower your monthly payment.
2. Raise your income
On the other side of the equation, you could try to increase your income. Possibilities include:
- Negotiating a higher salary
- Earning a promotion
- Taking on a side hustle
- Starting a side business
3. Explore low-down-payment mortgage options
- 0% down payment loans:
- VA loans. Backed by the U.S. Department of Veterans Affairs (VA), these loans are available only to qualified military borrowers.
- USDA loans. If you live in a rural area, a loan backed by the U.S. Department of Agriculture (USDA) is one way to buy a home without saving for a down payment.
- 3% down payment loans:
- Fannie Mae HomeReady loans: These conventional loans have income limits, but they can be a great option if you meet the requirements.
- Freddie Mac Home Possible loans: These conventional loans come with income limits and a slightly higher credit score requirement than the HomeReady loans (660 versus 620).
- Conventional 97% loan-to-value (LTV) options: These conventional loans are designed for first-time homebuyers, so they come with flexible guidelines and can be combined with down payment assistance programs.
- 3.5% down payment loans:
- FHA loans allow you to put down 3.5% if you have a credit score of at least 580. But they have loan limits and a federal debt (CAIVRS) check. Any federal student loan debt that has been delinquent or in default will show up on a CAIVRS report.
4. Apply for down payment assistance
Down payment assistance (DPA) programs help people achieve their homeownership dreams by providing funds to cover a down payment and closing costs on a home purchase. The funds can come via a grant or second mortgage, and in some cases, may not need to be repaid.
Federal and state housing agencies, as well as nonprofits, offer DPA programs. A great way to find them is to research first-time homebuyer programs in your area or reach out to a local housing counselor or housing nonprofit.