You did the right things – you finished college and started a career, but you can't get a mortgage due to owing on student loans. Mortgage lenders review your debt-to-income ratio when approving your mortgage application. According to the Consumer Financial Protection Bureau, if your debt, including your housing payment, exceeds 43 percent of your gross income you may not qualify for a mortgage. Education loans can quickly cause your debt to rise above levels acceptable to mortgage companies.
Understanding How Student Loans Can Impact Mortgage Approval
Debt-to-income ratio measures the proportion of debt payments to your monthly gross income. Here's an example. If your gross income is $4000 monthly and your housing expenses are $1500 a month, credit card payments are $200 a month and your college loan payment is $300 per month, the total of your debt and housing payments is $2000. Calculate debt-to-income ratio by dividing your debt amount by your gross monthly income. In this example, $2000 divided by $4000 equals 50 percent. This debt-to-income ratio is too high to qualify for most mortgage loans. If you didn't have to pay $300 per month for student loans, your debt-to-income ratio would be 42.50 percent, which is within the qualifying range for eligible debt-to-income ratios. Keep in mind that this includes a mortgage amount of $1500. With a lower mortgage amount, you would qualify for a home.
Tips for Reducing Debt
If you want to buy a home while carrying student loan balances, there are several options.
1. Consider refinancing your student loans into one loan with a lower interest rate. Check out options with private lenders and with the U.S. Department of Education.
2. Start with your highest cost credit card or loan balance and pay the most you can toward that debt until it's gone. Then take the money you were paying toward the highest cost debt plus the minimum payment for the next debt and pay on the second debt until it's gone. By the time you get to the third credit card debt or your student loan, you'll be able to pay down the next debt faster and with more cash.
3. Continue to shop loan rates while paying down your education loans and other debts. It may be possible to refinance student loan debt to a new loan with a lower rate. Always check multiple loan quotes before choosing a consolidation loan or student loan refinance option.
4. Generate additional income that's dedicated to paying down your student loan debt to help with buying a home sooner rather than later. Consider having garage sales, taking on part-time jobs or setting up electronic auctions of things you no longer want or use. Extra income generated by these activities can help you knock down college debt and other bills that can interfere with your mortgage approval.
Keep in mind that buying a less expensive home can reduce the amount you need to borrow for a home loan. A lower mortgage amount will lower your monthly payment and also help reduce your debt-to-income ratio. This strategy can help you if you're buying your first home or don't have significant financial resources for paying down debt or increasing your down payment.