How Student Loans Impact Mortgage Eligibility
Student loan debt is the second largest debt category in the United States, only trailing consumer debt. With student loan repayment starting again in September 2023, many individuals are worried about how this will impact their ability to qualify for a mortgage. However, contrary to popular belief, carrying student loans does not necessarily disqualify you from owning a home. I’ll try to help understand and explore the latest guidelines for getting a mortgage while paying off student loans and how lenders can help student loan carriers qualify for mortgages.
Debt-to-Income Ratio (DTI)
One important factor that can impact eligibility for a mortgage is the borrower’s debt-to-income ratio (DTI). The DTI is calculated by dividing the borrower's total monthly debt payments by their monthly gross income. Lenders typically prefer a lower DTI, ideally less than 36%. However, depending on the loan type, a higher DTI may be acceptable. For example, FHA loans are more lenient on DTI and can accept up to 49.99%.
When a borrower has student loan debt, it is important to be aware of how that impacts their DTI. In some cases, the monthly student loan payments may push the borrower’s DTI above the acceptable limit, making it more difficult to qualify for a mortgage. However, if the borrower is pursuing income-driven repayment or other student loan payment strategies, the payment amount may be lower, therefore improving their DTI ratio.
A solid credit score is also a critical factor when it comes to mortgage eligibility. Lenders generally prefer credit scores of 620 or higher; however, some loan programs may accept lower credit scores as low as 540, with additional requirements and as little as 3% to 0% down payment.
When it comes to student loans, it’s important to make on-time payments to avoid negatively impacting your credit score. Late payments or defaulting on a student loan can severely damage your credit score and make it more difficult to qualify for a mortgage.
Different loan programs have varying guidelines for borrower eligibility. Some of the most popular loan programs include FHA, VA, and Conventional mortgages including 1st time homebuyer and down payment assistance programs.
FHA loans are government-backed and require a smaller down payment of 3.5%. They also have more flexible credit score and DTI requirements compared to conventional loans. However, there is a limit on the loan amount and lower in some areas than others.
VA loans are for eligible veterans and active-duty military members. These loans often have zero down payment requirements and flexible DTI and credit score requirements.
Conventional mortgages are not government-backed and have stricter guidelines for credit score and DTI. However, these loans can offer lower interest rates and a greater variety of loan term options with as little as 3% or 0% down payment.
Ways Lenders Can Help
Mortgage lenders can play a crucial role in helping student loan carriers qualify for mortgages. They can provide education to borrowers on how their student loan debt impacts their eligibility and work with them to develop a plan to improve their DTI ratio and credit scores. Additionally, lenders can help borrowers take advantage of different loan programs and explore alternative loan structures, such as 2-1 rate buydowns, or permeant interest rate buydowns.
It is possible to qualify for a mortgage while carrying student loan debt. Borrowers should be aware of the guidelines for different loan programs, their DTI ratio, and their credit score. Mortgage lenders can provide valuable support and education to help borrowers understand how their student loan debt impacts their eligibility and make a plan to improve their chances of getting a mortgage. By working together, borrowers and lenders can navigate the complexities of student loan debt and homeownership to achieve their dreams of owning a home.
* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.