Do Student Loans Affect Buying A House?

Student loans can be a major roadblock when pursuing other financial goals, like buying a house. Lenders like to approve borrowers with minimal debt, mostly because taking on a second loan payment increases the risk of defaulting on one of the loans — or both.

Beyond the challenges of getting approved, student loans can also make it harder to save for important things like a down payment, closing costs and moving expenses. However, there are ways to minimize the impacts of your student loans.

Do student loans affect buying a house?

Having student loans doesn’t affect whether or not you can get a mortgage. However, since student loans are a type of debt, they impact your overall financial situation – and that factors into your ability to buy a house.

There are a few different ways your student loans affect your finances, including your debt-to-income ratio, savings potential and credit score. All of these could contribute to your ability to buy a house.

Student loans add to your debt-to-income ratio

Lenders use the debt-to-income (DTI) ratio to determine your eligibility for a mortgage. DTI includes all of your monthly debt payments – such as auto loans, personal loans and credit card debt – divided by your monthly gross income. Student loans increase your DTI, which isn’t ideal when applying for mortgages.

Most mortgage lenders require your total DTI ratio, including your prospective mortgage payment, to be 45 percent or less, though it’s possible to find lenders that will accept a higher DTI. Having a high student loan payment, in addition to your other monthly bills, could push your DTI past the required threshold and make it harder to qualify.

Student loan payments hurt your ability to build savings

Buying a house requires an upfront down payment, typically thousands of dollars. If you have student loan payments, you may find it difficult to save for a down payment on top of your monthly student loan bills, which can easily delay your ability to buy a house.

For example, having a student loan payment of $400 per month means you are missing out on $4,800 in potential savings for a home each year. Depending on the home loan you choose and housing prices in your area, that amount of money could add up to a down payment in just a few years.

If you’re struggling to save for a down payment, you could explore low-down-payment loan options, such as government-sponsored loans. Instead of requiring the traditional 20 percent down payment, these programs can help you purchase a home with very little – or even zero – down. Be aware of the potential downsides of a no down payment loan, such as higher interest rates.

Student loan payment history factors into your credit score

Payment history is the most crucial factor in your credit score, accounting for 35 percent of the total score. Borrowers with an on-time track record will see their score increase, while those who have made late payments on their student loans will see a reduced score. Consumers who have loans in default will also see a dip in their scores.

Mortgage lenders heavily weigh your credit score when determining your approval chances and your interest rate. If you’ve had trouble paying your student loans on time, your chances of qualifying for a mortgage could be hurt. You can reduce your chances of missing a payment – and negatively impacting your credit score – by turning on autopay.

The good news for borrowers? Credit bureaus generally give more weight to recent mistakes over past ones, meaning any mistakes you made at the beginning of your student loan repayment journey will have less significance over time.

Even though payment history is the most vital factor, other elements make up your credit score, including the total amount you owe, the length of your credit history and your credit mix. If you’re strong in these areas, it will boost your overall score.

Should I pay off student loans before buying a house?

There are several reasons you shouldn’t wait to buy a home if you’re ready, the biggest of which is the rise in housing demand and prices over the last several years. It could make sense to lock in a home as soon as possible before prices increase even more – just be mindful that mortgage rates are still quite high.

That said, in some scenarios, it could make sense to pay off student loans before you buy a home. If you can pay off student loans in one year or less, for example, you might want to complete your payments before taking on the additional monthly expense of a mortgage.

The same is true if student loan payments take up a significant portion of your monthly budget and a mortgage payment would add undue hardship.

Ways to buy a house with student loan debt

Plenty of people who buy a house also have student loan debt. Here are a few ways to manage your student loan debt while buying a house.

• Apply for down payment grants: Local and national down payment assistance programs can provide down payment grants to first-time homebuyers. These grants will cover part or all of your down payment. Borrowers usually need a credit score of 600 or more.
• Look into 0 percent down payment loans: Former and current service members are eligible for VA loans, which do not require a down payment. Those who buy homes in rural areas can also take out a USDA loan, which has a 0 percent down payment.
• Decrease your DTI: Because the DTI factors in only your monthly debt payments and not the total remaining amount, you can decrease the DTI by paying off some small debts quickly. You can also switch to a longer student loan repayment plan — such as an extended repayment plan or an income-driven repayment plan — to reduce your monthly student loan bill.
• Refinance your student loans: Borrowers who took out private student loans when interest rates were high should consider refinancing to a lower interest rate. Refinancing to a lower rate will save you interest and possibly decrease your DTI, making it easier to qualify for a mortgage.

Bottom line

Student loan debt may be part of your life for a decade or longer, but this doesn’t mean you have to wait to buy a home. The key considerations you’ll want to keep in mind are your credit score, your income, your other debts and the down payment you can save up before you start your search.

At the end of the day, your student loan payment is just another bill you have to pay each month. With some smart financial moves, your student loans don’t have to ruin your dream of homeownership.