As student loan debt hovers around $1.7 trillion, how much student debt is too much to qualify to buy a house?
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As interest rates continue to sit near historic lows (compare today’s lowest mortgage rates here), many Americans are dreaming of buying a home. But many are also plagued by student loan debt. The good news: Student loan debt doesn’t have to prevent you from buying a house. Indeed, lenders are OK with you having some debt, including student loan debt, just not too much.
How much student loan debt is too much if you want to buy a house?
Your debt-to-income (DTI) ratio, which compares how much you owe each month to how much you earn, typically needs to be below a certain threshold to get a mortgage: “Most lenders look for a DTI that’s 43% or lower. If your DTI is higher, many lenders think you’re a risky candidate for a loan and will have trouble paying your mortgage each month,” says Rebecca Safier, certified student loan counselor and debt expert at Student Loan Hero. Note that with some government-backed mortgages, like FHA loans, the DTI is typically about 43%, while other lenders may look a lower percentage.
This example from the Consumer Finance Protection Bureau shows you how a calculation of your personal DTI might work: If you pay $1,500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. If your gross monthly income is $6,000, then your DTI is 33%. Not all lenders calculate your DTI the same way, and not all debts are always included in it, but this will give you a rough idea.
Should I refinance or pay down my student loans to lower my debt obligation?
If you just calculated your DTI and it’s higher than 43%, don’t freak out yet: It might be possible to lower it. If you have private student loans, you may want to consider paying down the balances or refinancing them to lower your monthly debt obligation, says Leslie H. Tayne, financial attorney and founder and managing director of Tayne Law Group. You can see the lowest rates for refinancing your student loans here.
“When you refinance student loans, you can choose a new repayment term. If you’re trying to lower your monthly payments, you could opt for a longer repayment term of 10 to 20 years, but expect to pay more interest over the life of your loans,” says Safier. That can have an additional benefit for you too, as homeownership costs far more than your monthly mortgage payment. “So if you can pay off or refinance your student loans before buying a house, you’ll be better able to cover new potential challenges like a leaky roof or broken stove,” says Tayne. Check out your options for refinancing your student loans here.
“If you have federal student loans, you could try lowering your monthly payments by putting them on an income-driven repayment plan. These plans typically reduce your monthly payments, but they also cost you more in interest charges in the long run, so you’ll have to decide whether you’re comfortable with the trade-off,” says Safier.
What else do lenders look at when you apply for a mortgage?
Of course, lenders look at other things besides your DTI, including your credit score, the amount of the loan you want, your down payment, and more, says Tayne. But these are things that you can tackle: When it comes to your credit score, since amounts owed make up a big part of your score, paying your balances down could help increase it. “On-time payments are also an important factor. You don’t necessarily need to pay off all your student loans to qualify for a mortgage, but it is useful to understand how they’re impacting your credit, and as a result, your ability to get a mortgage,” says Safier.
Saving for a down payment is also harder when you have student loan debt. But even if you can’t save 20%, that may be OK: Look into VA loans, FHA loans and USDA loans.
Even if you qualify for a mortgage, you’ll need to decide if you’re comfortable carrying mortgage debt and student debt at the same time. “Perhaps buying a home means you’ll owe student loans for longer than you would if you put that money into paying them off faster. There’s no one-size-fits-all answer here; you’ll have to consider your priorities when it comes to repaying debt and owning a home and decide which comes out on top. Plus, you’ll want to take a close look at your budget and make sure you can afford to pay off your mortgage and student loans at the same time,” says Safier.
If all these calculations are stressing you out, know that you’re not alone. “If you already have student loan and auto debt, you might find it difficult to squeeze in a home loan while keeping all your debt payments at 36% of your income or less. At the same time, paying student loans and rent make it hard to save for a down payment,” says Holden Lewis, home and mortgage expert at NerdWallet.
