Getting a Mortgage With Student Loan Debt

A 2016 survey by the National Association of Realtors found that 71 percent of non-homeowners believe that their student loan debt delays their ability to buy a home.

Since approximately 43 million Americans have student loan debt, totaling about $1.4 trillion, chances are you or someone you know is retroactively paying for their higher education.

“Student loan debt can be a roadblock for some borrowers because the cost of college is not in line with wage growth,” says Ray Rodriguez, a regional mortgage sales manager for metro New York with TD Bank. “How much of an obstacle it is depends on the amount owed and on your income.”

While some would-be buyers simply avoid applying for a mortgage — thinking they can’t qualify because of their student loan payments — mortgage lenders say there are steps you can take to increase your chances of loan approval. In addition, loan guidelines recently changed that can make it easier for you to qualify.

Fannie Mae Student Loan Debt Changes

There’s been a big change in how lenders evaluate student loans that could have a big impact on borrowers, especially those with large balances, says Jessica Eden, a branch manager with AmCap Mortgage in Lincoln, Neb. 

Until recently, Fannie Mae guidelines required lenders to count 1 percent of a borrower’s student loan balance as a monthly debt obligation, regardless of their actual payment. For example, a borrower with a $50,000 student loan balance was assumed to be paying $500 per month, even if their payments were income-based or deferred and they were paying just $100 per month.

“Now we can use documented information and use the real student loan payment a borrower is making,” says Tom Fiddler, a senior vice president for production and retail with loanDepot in Irvine, Calif. 

The student loan payment listed on your credit report is used to calculate your debt-to-income ratio, which compares the minimum payment on all your debt including your housing payment with your gross monthly income. 

“About 50 percent of student loan repayments are not shown on credit reports, so if that’s the case, we can get repayment documentation from your student loan servicer,” Eden says. “If that’s not available, then we have to go back to that 1 percent of your balance rule.”

Loan Programs to Help Borrowers With Student Loans

Some lenders have special programs for borrowers with student loans, such as loanDepot’s loan for medical professionals. Fiddler says medical professionals with student loans that have been deferred for 12 months or longer, such as while they complete an internship, can avoid having that debt repayment counted as part of their debt.

“The assumption is that their income will increase dramatically so they will pay off the debt quickly as soon as they are fully employed,” Fiddler says.

Another potential option is the 40-year mortgage loan program which requires a 10 percent down payment and good credit, but has a 10-year interest-only initial repayment period that could help borrowers tackle their student loan debt while they make lower mortgage payments. The following 30 years are fully amortized.

Various localities are experimenting with programs for student loan borrowers, such as Ohio’s “Grants for Grads” program that offers down payment assistance for first-time buyers who have graduated within the previous three years and meet other income and purchase price requirements.

In Maryland, one program for student loan borrowers is limited to the purchase of a list of state-owned foreclosures, while the “You’ve Earned It” program allows buyers purchasing a home in designated “sustainable communities” to qualify for $5,000 in down payment assistance if they have at least $25,000 in student loan debt.

Five Tips for Improving Your Loan Qualification

Lenders suggest taking the following steps to help start you on the road to homeownership:

1. Review your student loan repayment options. Rodriguez suggests contacting your student loan servicer to review options for refinancing, consolidation, or recalculating your payments to make them more affordable. You can also find out if paying extra for a year or two could allow you to lower your payments in the future. 
2. Establish a budget. Whether you have student loans or other debt, Eden recommends establishing a realistic budget to determine how much you can afford to borrow for a home. Conventional loans require a maximum debt-to-income ratio of 43 percent; federally insured FHA loans may allow some additional wiggle room provided you have a steady income and good credit. 
3. Improve your credit. Check your credit report at www.annualcreditreport.com, where you can get a free report from each of the three credit bureaus once per year. “Talk to a lender to review your credit report and get individualized advice on how to improve your credit score,” Eden says. “A higher credit score will get you better loan terms and a lower interest rate.”
4. Identify funds for a down payment. Increasing your down payment to 20 percent eliminates the need to pay private mortgage insurance and lowers the amount you need to borrow. Saving more for a down payment or getting a gift from your relatives can overcome the challenge of student loan debt. 
5. Reduce other outstanding debt. Eden recommends keeping credit card debt to 30 percent or less of the limit on each card. Paying off debt will improve your credit score and your debt-to-income ratio. 

“No one loan program fits all, so no matter what your situation, it’s smart to consult a lender to evaluate your individual options for a mortgage,” Fiddler says. 

If you’re looking to build your new home, your builder typically will have a preferred lender to work with you. Regardless, it’s wise to consult a few outside lenders to discuss your financing choices.