With so many people carrying student loan debt years after they’ve hung their diplomas on the wall and some grads delaying purchasing a home because of their fear of debt, it’s normal to wonder whether it’s even possible to buy a house with student loan debt.
Short answer: yes!
Of course, as with most topics, there are caveats. Not everyone with student loan debt will be able to secure financing, but student loan debt is not an automatic no. In fact, plenty of people with student loan debts have mortgages and great credit scores. Here’s what you need to keep in mind when looking for a mortgage while still paying off your education.
There are a couple of ratios that help provide a full picture of your financial health. Let’s start with your debt-to-income ratio.
A debt-to-income ratio takes into account all the debt you have and then compares it to your income. Your debt includes more than just your student loans, though. If you have a car payment, credit card debt, or any other loans, those are combined to come up with your debt total.
To determine your debt-to-income ratio, add up your monthly debt payments. For example, if you pay $200 a month towards your student loans, $100 towards your credit cards, and $200 towards your car payment, your monthly debt payment equals $500.
Next, determine your monthly gross income. Gross means before taxes and exemptions, so if your job pays $48,000 annually, your monthly gross income is $4,000.
Next, divide your debt by your income and then multiply it by 100 to get a percentage:
500 / 4000 = .125 * 100 = 12.5%
Generally, you want a debt-to-income ratio less than 43% to secure a mortgage, though some lenders—including hard money lenders—may lend to you even if your debt-to-income ratio is higher. If you have a high debt-to-income ratio, you may need to focus on paying down more of your debt before securing a mortgage.
As part of your credit score, your debt-to-credit ratio can play a large role in determining whether you’ll be able to borrow and from whom. It helps illustrate how much of the revolving credit available to you you’re using as a percentage and may also be called your credit utilization rate. Revolving credit, for most people, is just credit cards. Your student loans, auto loans, and other loans where you pay a fixed monthly amount are not considered revolving credit and aren’t used in this calculation.
To get your debt-to-credit ratio, add up the balance on your credit cards and then add up the total credit limits on those cards separately. Divide the balance by the credit limit total and multiply by 100 to get a percentage.
For example, if you have $2,000 in credit card debt and a limit of $4,000, then your debt-to-credit ratio is 50%.
A ratio of 30% or less is considered to be a good debt-to-credit ratio.
If you have a high ratio, don’t worry! You can improve it by paying down your debt. Doing so can also help raise your credit score.
Have you been making your student loan payments, or have you missed a few?
Your payment history helps show how reliable you are when it comes to paying down debt. A good payment history helps show you’re able to manage your debt and stick to the terms of your loans—two things that will certainly work in your favor. Plus, it’s a large chunk of your credit score.
If you have a spotty payment history, commit to on-time payments and start repairing your credit. You may still be able to secure a mortgage despite previously missed loan payments, but the terms may not be as favorable.
Your student loans may help showcase how you handle debt and provide you with a long credit history. If you’ve been making your payments on time, this is a good thing. It helps show that you’re responsible with debt and conscientious.
You can check your credit report for free once a year. Make sure everything is correct and report any issues.
Many of the above factors go into calculating your credit score. While traditional lenders tend to underwrite mortgages for good or great credit, those interested in buying a home with bad or poor credit can look to alternative lenders like Associates Home Loans.
At Associates Home Loan, we know that people make mistakes. Poor credit does not mean poor character! We’ve helped many people with poor or bad credit rebuild their financial lives and move into their dream homes.
Your credit score doesn’t just impact whether or not you can get a loan (and from whom), it also plays a large role in determining the terms of your loan, such as the interest rate.
A good credit score is considered to be one over 700, with 800+ being excellent. If your credit score is in the 500 or 600 range, though, you can still get a mortgage as long as you work with a lender that tailors their loans to individuals with poor credit.
Do You Have a Downpayment?
If you have high student loan payments, it may be hard to save money, which in turn, makes it difficult to get a mortgage. Any lender will want you to put down a downpayment on a home because it helps show you’re committed and invested in homeownership. Basically, it means you have skin in the game. If you don’t have a downpayment, it may be time to look at how you’re budgeting and see where you can save money to go towards a future downpayment. Alternatively, consolidating your student loans may help reduce your payments so you can save for a home.
If you have cash in the bank for a downpayment, great! Start looking for that dream home if you haven’t already.
Buying a House with Student Loans? Apply Now with Associates Home Loan
Have you found a house you’d love to move into? Associates Home Loan can help you get the keys. See whether you’re eligible for a loan now—apply today or give us a call at 813-774-4285.