Do student loans affect buying a house? Many middle-aged millennials today certainly think so. In a 2021 CNBC-Harris Poll survey of millennials ages 33 to 40, about 1 in 6 who didn’t yet own a home said they believed their student debt was affecting their ability to buy. Show
And with so many college graduates carrying more student debt than their annual income, it makes sense that they feel their student loans may be a major homeownership roadblock. But how much do student loans affect buying a house? And are there special mortgage rules that apply specifically to home buyers that have student debt? Let’s take a look at all the details regarding student loans and mortgages. While you’ll need to have a good credit score to qualify for a mortgage and be offered the best interest rates, this isn’t the only factor that mortgage lenders consider. Another key factor is your debt-to-income ratio (DTI). There’s actually more than one kind of DTI. Lenders generally look at both your front-end DTI and back-end DTI. Get Quotes for Your Doctor Mortgage What mortgage product would you like a quote for?Home Purchase Home Refinance What is Your Occupation Status Currently?NEXT What most closely represents the price range of the house you’re searching for?What is your preferred down payment?What stage are you at in the home buying process?How soon do you hope to secure a mortgage approval?How many banks would you like quotes from?Have you experienced any bankruptcies or short sales?NEXT Full NamePhone NumberState where you want to purchase your homeMetro area where you would like to purchase your homeCitizenship statusUS Citizen Permanent Resident Foreign Citizen Communication preferenceWould you like to add any additional details?GET MY QUOTES Front-end DTI ratioYour front-end DTI is found by dividing your anticipated monthly mortgage payments and homeownership expenses (mortgage, property taxes, mortgage insurance, homeowner’s insurance, etc.) by your monthly gross income. For example, if you have a monthly income of $2,000 and the lender anticipates your monthly homeownership expenses will be $500, then your DTI is 25%. To qualify for conventional loans, you’ll generally need to keep your front-end DTI under 28%. Technically, your student loans don’t affect your front-end ratio. But you’ll still want to keep your front-end ratio as low as possible. A lower front-end DTI could help you get approved for a mortgage when you have a back-end DTI on the high end. Back-end DTI ratioWhile your front-end DTI only takes your housing costs into account, your back-end DTI takes all outstanding debt that you owe into account. This means your student debt is considered for your back-end DTI. And this where student loans and mortgages sometimes don’t get along. To determine your back-end DTI, divide your monthly debt payments by your gross monthly income. Back-end DTI limitsTo qualify for a mortgage, you’re typically going to need a front-end ratio of no higher than 28% and a back-end ratio no higher than 36% (referred to as 28/36). But certain loans will allow higher limits:
While these programs can help you get past the typical 36% back-end DTI limit, there are fewer options if you have a DTI that’s 43% or above. This is the maximum DTI you can have while remaining eligible for a Qualified Mortgage. How student loans affect your back-end DTI ratioLet’s say for example you’re applying for a mortgage and you have a monthly income of $4,000. Then let’s say at your housing costs will be $1,000 a month, you have a car payment that’s $300 a month, and a monthly student loan payment of $700. This is how the math would work out: $1,000+300+700= $2,000 (total debt obligations) $2,000/$4,000 = 50% back-end DTI This DTI is obviously fairly high and would make you ineligible for a mortgage loan in most circumstances. But watch how the situation would change if your monthly student loan payment was only $350 a month. $1,000+300+350= $1,650 (total debt obligations) $1,650/$4,000 = 41% back-end DTI This DTI would still be a little high for a Conventional Loan, but could make you eligible for an FHA loan. And if you decided to buy a slightly less expensive home, you could drop your DTI even lower. This example illustrates how important reducing your student loan cost could be to helping you get approved for a mortgage. How to improve your back-end DTI ratioIf you have a ton of student loan debt, the previous section may have you worried. Don’t stress. There are lots of strategies that can help you lower your DTI. Here are a few options. 1. Increase your down paymentIf your debt-to-income ratio is a concern, you may want to delay your home purchase a bit so you can save up for a bigger down payment. The more money you pay upfront, the lower your DTI ratio will be. Yes, many of the first-time home buyer programs have low down payment requirements. And many states offer down payment assistance programs as well. But when it comes to getting your DTI into an acceptable range, making a small down payment may actually be counterproductive. 2. Switch to an income-driven repayment (IDR) planIf all, or a large majority, of your student loans are federal loans, you may want to consider signing up for an income-driven repayment (IDR) plan. It’s true that IDR plans don’t change how much you owe. And, in fact, you’ll often pay more in interest with these plans. But what they can change is your monthly payment. And that’s the whole key to qualifying for a mortgage – getting your monthly obligations into an acceptable range. An IDR repayment plan like Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE) could help you do that. 3. Refinance your student loansDepending on how much you need to cut your student loan payment down by, refinancing into a loan with a lower rate could help you get there. This wouldn’t be a good option if you’re working toward Public Service Loan Forgiveness (PSLF) or if you have a very low income. But if your income is high (making income-driven plans less helpful) and you aren’t working toward PSLF, refinancing could not only help you pay less overall on your student loans but possibly also help you qualify for a mortgage. Check out our free calculator to see how much you could save by refinancing. How new Fannie Mae student loan guidelines could helpIn April 2017, Fannie Mae instituted new monthly debt obligation guidelines specifically designed to help individuals with big student loans qualify for a home loan. So how much do student loans affect buying a house under these new rules? Here’s what you need to know about Fannie Mae’s DTI guidelines for student loan borrowers and how to best take advantage of them. Get Quotes for Your Doctor Mortgage What mortgage product would you like a quote for?Home Purchase Home Refinance What is Your Occupation Status Currently?NEXT What most closely represents the price range of the house you’re searching for?What is your preferred down payment?What stage are you at in the home buying process?How soon do you hope to secure a mortgage approval?How many banks would you like quotes from?Have you experienced any bankruptcies or short sales?NEXT Full NamePhone NumberState where you want to purchase your homeMetro area where you would like to purchase your homeCitizenship statusUS Citizen Permanent Resident Foreign Citizen Communication preferenceWould you like to add any additional details?GET MY QUOTES 1. Debt paid by othersIf you have any debt — whether it’s student loans, credit card debt, or auto loans — that’s paid by someone else (like your parents), this is now excluded from your debt-to-income ratio. This new guideline does not apply, however, to mortgage debt. 2. Student debt payment calculationAs a result of this guideline change, lenders can now accept student loan payment information as it appears on credit report statements (as opposed to the old rule of 1% of your outstanding balance). This could be incredibly helpful for student loan borrowers who are on income-driven repayment plans. Oftentimes, monthly payments on IDR plans are much lower than what a normal amortized payment would be. For example, while a normal amortized monthly payment might be $700 a month, you may only be required to pay $50 a month on your IDR plan. As a result of these guidelines, in that scenario, only $50 of student debt would count against your DTI. Incredibly, this even includes $0 payments as long as you can provide documentation from your loan servicer that your $0 payment will continue. If your IDR plan currently requires a $0 payment, then your student loans won’t count against your DTI at all. 3. Student loans in defermentUnfortunately, if you’re trying to buy a house with student loans in deferment, you can’t exclude your student loan payments from your DTI. In other words, you can’t say your payment is $0, even if it technically is. Instead, the lender must either set a payment amount of 1% of your outstanding balance or the payment that you would make with a normal amortization schedule. Although this may seem like a bit of a bummer, this rule has been put in place to protect you as the consumer from getting taken advantage of by predatory lenders who will give you a loan you can’t afford. If your student loans are currently in deferment, you’re probably experiencing financial difficulties, and it would be best to hold off on a mortgage until your situation improves. How “compensating factors” could helpIf you’re still concerned that your student loan payments will make your DTI ratio too high, you do have options. One is to try to find a lender who offers non-conforming loans. These products, however, will usually be more expensive. If you’re trying to use a government mortgage product like an FHA loan, your lender may be able to overlook a debt-to-income ratio if you have compensating factors. With these factors taken into account, the maximum front-end and back-end DTI ratios for FHA loans increase to 46.9%/56.9%. There are several factors the FHA allows lenders to consider. But one that anyone could take advantage of is the “Verified Cash Reserves” compensating factor. If you save up enough cash to make at least three mortgage payments, this could help you qualify for a loan. Even up to 60% of your retirement income account funds can be taken into consideration. Another compensating factor that may apply to you is the “Significant Additional Income Not Reflected in Gross Effective Income” factor. You can qualify for this exception if you have significant income (like part-time income, overtime income, or bonuses) that isn’t reflected in your gross effective income. Note: as of June 2021, FHA loans now consider only your income driven monthly payment instead of 1% of the student loan balance. This will make FHA mortgages significantly more attractive for student loan borrowers with high debt to income ratios. Is getting a mortgage with big student loans a good decision?So we’ve seen that there are lots of options that could help you get a home loan even with a high DTI. But should you? Or would adding a mortgage obligation add too much stress and financial risk to your life? The goal for most people is to eventually have no mortgage at all. But you obviously need to start out with a mortgage if you want to own a home. Start here to compare your mortgage options. Get Quotes for Your Doctor Mortgage What mortgage product would you like a quote for?Home Purchase Home Refinance What is Your Occupation Status Currently?NEXT What most closely represents the price range of the house you’re searching for?What is your preferred down payment?What stage are you at in the home buying process?How soon do you hope to secure a mortgage approval?How many banks would you like quotes from?Have you experienced any bankruptcies or short sales?NEXT Full NamePhone NumberState where you want to purchase your homeMetro area where you would like to purchase your homeCitizenship statusUS Citizen Permanent Resident Foreign Citizen Communication preferenceWould you like to add any additional details?GET MY QUOTES You may want to consider getting advice from an expert. Student Loan Planner® consultants have helped thousands of student loan borrowers make smart financial decisions. Book a student loan consultation today. Will student loans be deferred past May 2022?Will the student loan payment freeze be extended again? The pause on federal student loan payments is slated to expire on Dec. 31, 2022, with payments expected to resume on Jan. 1, 2023.
Do deferred student loans count in debtDeferment and forbearance plans allow you to pause your student loan payments for a period of time set by your lender. But while you're not financially obligated to make those payments, you're not off the hook with your debt-to-income ratio.
Will student loans be deferred 2022?Student Loan Payment Pause Extended Through Dec. 31, 2022
The payment pause includes a suspension of loan payments, a 0% interest rate, and stopped collections on defaulted loans.
Does deferment count towards loan forgiveness?During the waiver, any MONTH during which your loan was not in default, deferment, or forbearance will count as a month toward 120 for loan forgiveness. The waiver does not look at actual payments made, just loan status.
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Getting a mortgage with student loans in deferment 2022
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