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Do Student Loans Affect Buying a House?

If you’re one of the more than 40 million Americans who have student loan debt and you hope to buy a house one day, it’s useful to know how student loans affect buying a house. Student loan debt doesn’t exclude anyone from buying a house, but it can make it more challenging. Continue reading to learn the ways that student loans affect buying a house!

Down payment

Most mortgages, which are loans used to buy a house, require a down payment. A down payment is a portion of the house cost that is paid at the time of closing. 

Student loan payments can take a large chunk of your income. It can be difficult for people with student loan debt to save enough to make a down payment. According to the National Association of Realtors, in 2017, 83% of non-homeowners were delaying buying a house because of their student loan debt. In most cases, student loan payments prevented them from saving enough for a down payment. 

Debt-to-income ratio

One of the biggest factors that lenders consider when evaluating an applicant’s eligibility for a mortgage is their debt-to-income ratio (DTI). This number is a percentage that compares your debt, including student loans, to your annual income. Lenders want to see an applicant with a low debt-to-income ratio. This shows that the applicant is able to manage their debt responsibly, and that they will pay their mortgage. 

To calculate your DTI, add up all of your recurring monthly debts–for example, student loan payments, credit card payments, and car payments. Use the minimum payment amount for each debt. Then, divide that number by your gross monthly income–your earnings before taxes and other withholdings. Multiply that number by 100 to get a percentage. 

Generally, a DTI of 43% or less is ideal for lenders. If your DTI is greater than 50%, you may want to focus on paying off your debts before buying a house.

Credit score

Another number that can determine your ability to buy a house is your credit score. A credit score is a statistical number that is used to evaluate a borrower’s creditworthiness. Credit scores consider factors like a borrower’s total debt and payment history. It can be used to evaluate how likely the borrower is to repay their debts. Mortgage lenders want to see a high credit score.

Student loans can have a positive or negative impact on your credit score. Making student loan payments on time and in full can improve your credit score. Missing payments or allowing loans to go into default can harm your credit score, making it more difficult to buy a house. 

See also: How do student loans affect credit?

Before you consider buying a house, be sure to understand how your student loan debt may affect your ability to do so.

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Frequently asked questions

Do student loans make it harder to get a mortgage?

Yes and no. Student loans, just as any type of debt such as credit card debt, are taken into account when a lender decides whether you are a risky borrower. They will consider that you have debt, and depending on the amount, it might make them less likely to approve you. It could also cause them to offer you less favorable interest rates to compensate for the risk.

On the other hand, borrowers who consistently make student loan payments on-time may also receive a benefit when it comes time to apply for a mortgage. Having a long-standing debt that you’re on good terms with helps improve your credit score. So, with this piece of credit history, the mortgage provider might be more willing to lend to you.

Does FHA consider student loans?

Yes. When considering you as a candidate for a Federal Housing Authority insured loan, providers will examine your debt-to-income ratio. As student loans increase your debt, it will hurt your chances to land a mortgage. That being said, it is far from being a deal-breaker, and many people with student loans manage to take out FHA loans.

Can I get a mortgage if I have student loans in deferment?

You can still get a mortgage if you have student loans in deferment. You’ll still have to report those loans, and they will hurt your debt-to-income ratio. That being said, the fact that they are in deferment might not hurt your chances itself. If you have deferred your loans because you are in school or in the military, it should not hurt your case.

If, on the other hand, you deferred your loans due to economic hardship, cancer treatments, or other factors based on hardship, you will probably have a hard time getting a mortgage. This will not be because of the deferment itself, but rather the circumstances which caused the deferment.