6 Ways to Get a Mortgage with Student Loan Debt

Many college graduates with the hopes of purchasing a home are wondering how they will qualify for a mortgage with the over-abundance of student loan debt they have piled up.

Is it possible to afford to take on one more monthly bill? Turns out it is, despite how things may look.

41% of college-educated Americans with student loan debt reported having postponed buying a home because of their debt, according to recent survey by Student Loan Hero. Making matters worse, student debt has surged 56% from 2004 to 2014.

Nonetheless, buying a home is still within reach, here’s how to qualify for a mortgage while managing your student debt.

Understand your DTI (debt-to-income) Ratio

One thing you will want to be clear about is your DTI, which compares how much money you owe (student loans, credit card, car loans) to your income.

Most lenders will require your DTI to be no more than 36%. The best way to consider this is to think about your monthly expenses. For example, if you make $6,000 a month but spend $500 paying off student debt and credit cards, you would divide $500 by $6,000 to get a DTI of 8.3%. This is well below where you need to be, but it will rise if you add a mortgage to your monthly expenses.

If you want to get an estimate of how much you can borrow for a home, while managing debt, make sure your mortgage doesn’t push your DTI into a “danger zone” of more than 36%. To figure, enter your income and debt into a home affordability calculator. In the above scenario, someone making $6,000 a month and paying $500 in debt would be able to afford a maximum mortgage payment of $1,680, which should be plenty to purchase a home in most neighborhoods.

Get prequalified first

A pre-qualification from your lender will help you see what the costs and down payment requirements will be for the particular house you are interested in. To determine what you qualify for, your lender will consider two-year employment history, credit, income and assets.

Refinance student loans

While most college borrowers receive loans from the federal government, it’s also an option to refinance through a private lender.

According to a recent survey by Credible.com, one-third of borrowers can get a lower interest rate with a private refinance, which could free up some space in your bank account for a mortgage payment.

Another option is to refinance and extend the length of your college loan. This will result in you having to make smaller payments and more money towards the mortgage. Of course, the downside is you’ll end up paying more interest over the life of your college loan. However, you can buy a house now, which may be worth it.

Check out Fannie Mae’s new policies

Fannie Mae, the government enterprise that buys home loans, recently rolled out two new policies designed to make it easier for college graduates with student debt to get a mortgage. Here’s what has changed:

  • Debt paid by other parties: The first policy gives applicants the ability to exclude nonmortgage debt (credit cards or student loans) paid by another person (parent or employer) from their debt-to-income ratio. This option may help you stay below the 36% threshold many lenders set.
  • Income-based repayment: In the past, lenders assessing your finances were required to factor in 1% of your college loan balance as your monthly payment. That amount could be pretty large and push you over the 36% DTI threshold. Now, Fannie Mae allows lenders to acknowledge that you can be paying much less than 1% if you participate in the federal-reduced payment income-based program. Signing up for this program will put you in a much better financial standing for being approved for a loan.

Look for programs for college grads

Nearly half of the states offer housing assistance to college grads with student debt. For example, Ohio’s Grants for Grads program provides assistance for first-time buyers or recent college grads in the form of reduced interest rates and down payment assistance. Some restrictions do apply, for instance you may be required to be within a certain area or neighborhood, but it certainly pays off to explore what options you may have.

Clean up your financial profile

Even if you’re slowly chipping away at your student loan debt, it doesn’t need to be the one factor that sinks your home-buying experience. Student loan debt is just one facet of what lenders consider when judging your eligibility for a home loan.

So what else counts? Your income and a good credit score. Be sure you pay down your credit cards and other debts on time to maintain your score. A sizeable down payment will also make a difference.

Save up for your down payment

Even if you’ve been trapped in a starter job with a low income and high student loans, another way to up your chances is to have enough cash to make a 20% down payment on your house. Lenders are less likely to disqualify your qualifications with a 20% down payment because it shows you are at a lower risk of defaulting on the loan.

However, many young buyers are unable to afford a 20% down payment, especially considering the amount of money saved for college grads is not much. But don’t lose hope if you’re low on cash, there are ways to save and make your dreams of being a homeowner come true.

Before you jump in, make sure you are actually ready to embark on this journey. Figure out how comfortable you will be with carrying multiple major debts over long periods of time. Do you feel confident with your current income? Is it large enough to comfortably afford a mortgage payment and student loan payments?

Right down a list of your financial priorities. Will buying a home require you to cut back on certain things? Will you have to dial back in other realms of your life? Consider what matters most to you, and plan accordingly.

There’s nothing wrong with taking the leap, if you are ready, contact your local lender for questions about financing options.