Skip links

Is It Hard to Get a Mortgage with Student Loans?

Can you get a mortgage with student loans? Yes, you can still own home if you have student debt.

According to Financeve’s analytics, fresh graduates are the second group to have more than $200K in federal student debt in 2021.

Mortgage providers typically look at your debt-to-income ratio (DTI), credit score, and employment history when deciding who gets approved for a mortgage.

Student loans might influence your debt-to-income ratio and how underwriters assess your financial obligations.

You may be required to put down as much as 20% of the home purchase price depending on the sort of mortgage you are interested in.

There may be a 3% to 5% fee tacked on to the loan amount. To ensure that you have enough cash for the down payment and closing costs, lenders will examine your finances thoroughly.

If you want to update your application, pay off your debt, or refinance it, there are ways to do so.

We’ll be breaking down 4 options to help you get your mortgage application accepted and how Biden made it easier to qualify for a mortgage.

Can I Get a Mortgage with Student Loan Debt?

Yes, here are 4 options to qualify for a mortgage while having student debt:

1. Consolidate Your Federal Student Loans to Lower Monthly Payments

The Department of Education allows you to combine multiple federal student loans into a single consolidation loan.

You only can consolidate federal student loans.

If you consolidate your student debts, it won’t lower your interest rate and may end up costing you more in the long run.

You may also like: How to Pay Off 200k in Student Loans

2. Refinance All Student Loans to Lower your Interest Rate

You can refinance student loans to lower the interest rate and make repayment more affordable. They are subsequently bundled into a single private loan.

Lowering your interest rate will result in greater savings on your monthly payment.

You can reduce your payment even more by extending the length of your repayment. However, extending your term might significantly raise the overall cost of repaying.

You owe $29,000 in student debt, which is close to the national average for a bachelor’s degree in the United States.

You will repay your loan in 10 years with a 6% interest rate, for a monthly payment of $322. Throughout the life of your loan, you will pay a total interest of $9,635.

If you took out a 5% loan for 15 years and stretched it out, your monthly payment would be $229, with a total interest charge of $12,279.

Refinance your student loans at least 6 months before applying for a mortgage and make all payments on time to get the most out of it.

Any negative effects of a hard credit pull or a new line of credit linked with the refinancing will be alleviated if you have an established good payment history.

If you want to put a down payment or pay closing expenses, you can utilize the money you save each month on your payments.

3. Consider Paying Off Other Debt To Increase Your Debt to Income Ratio

If you can afford a home with your current income and are on track with your emergency fund and retirement savings, you may be able to buy one.

If you can’t afford it, consider paying off smaller debts first. Personal loans, credit cards, and automobile financing are all examples of small debts that you might pay off.

You might lower your recurring bills, which will improve your DTI and demonstrate to mortgage lenders that you have more money available for a house payment.

Repaying small debts will not improve your credit score right away, but paying off revolving debt (such as a credit card), can have a big impact.

Your credit card limit is shown on your credit report as a possible credit you might use. Using less of your available credit raises your score.

More: Refinance My Home to Pay Off Student Loans: Is It Make Sense?

4. Increase Your Income

A stable work history of at least 2 years is desirable for mortgage lenders.

Your job history doesn’t have to be in the same profession, but any gaps in employment might be a warning sign.

Making more money is one of the most effective methods to lower your Debt to Income Ratio.

If you don’t have a day job that pays enough, consider working part-time or developing your main hustle into a paying position.

The longer you maintain your new revenue stream, the more compelling your application will be.

Underwriters are more inclined to accept it if you can show that you have a solid and consistent work history — and your new job pays more.

How to Get a Mortgage with Student Loan Default?

Any form of default can have a negative impact on your credit score, making it more difficult to qualify for a mortgage or requiring you to pay a higher interest rate.

The newer the default, the more probable it is to lower your score and have a big influence. You can check your credit score and see if the defaulted student loan appears on your credit report using credit monitoring applications.

If you apply for a mortgage with a defaulted student loan on your credit record, lenders will normally want you to give a letter of explanation that explains why the default happened and any efforts you took to fix the situation.

It is critical to give details on any settlement or payment plan you created to cure the default. Any letter you send to the lender should be truthful, brief, and focused on how you sought to remedy the problem.

More: Pay Off Student Loans or Buy a House?

How Biden Made It Easier For Student Loan Borrowers To Get A Mortgage

The Federal Housing Administration (FHA) has made modifications to simplify single-family FHA loans for students during the summer of 2021.

To comprehend the change, you must first understand how lenders used to analyze student loan payments to determine eligibility.

Lenders like debt-to-income ratios of 43% or less, which indicates that your overall debt payments should not exceed 43% of your income.

The Biden administration’s new regulation, which is still under review, allows FHA lenders to stop calculating student loan payments at 1%.

Instead, they’d use their actual student loan payment to determine eligibility for an FHA loan.

This change may make it possible for individuals with significant student loan debts to qualify for an FHA loan, which they could not before.

For over 80 years, the FHA has offered a variety of mortgage alternatives that have helped many people from all walks of life to own their own homes.

Frequently Asked Questions