Updated: Jul 28
If you're a recent graduate or someone who has been repaying student loans for a while, you might be wondering whether your student loans will affect your ability to buy a house. Unfortunately, the answer is yes, student loans can have an impact on your home-buying journey. In this post, we'll explore how student loans can affect your ability to get a mortgage and what you can do to mitigate their impact.
How do student loans affect getting a mortgage?
Student loans can affect your ability to get a mortgage in several ways. Here are some of the most significant ways that student loans can impact your home-buying journey:
Debt-to-income ratio (DTI)
One of the primary factors that lenders look at when deciding whether to approve your mortgage application is your debt-to-income ratio (DTI). This is the percentage of your monthly income that goes toward paying off debt. Student loan payments count toward your DTI, which means that the more student loan debt you have, the higher your DTI will be. If your DTI is too high, you may not be able to qualify for a mortgage or may only qualify for a smaller loan amount.
2. Credit score
Your credit score is another important factor that lenders look at when considering your mortgage application. Student loans, like any other type of debt, can have a negative impact on your credit score if you miss payments or are late with payments. This can make it harder to qualify for a mortgage or may result in a higher interest rate.
3. Down payment
Student loans can also impact your ability to save for a down payment. If you have a significant amount of student loan debt, you may need to allocate more of your income toward student loan payments, leaving less money available for saving for a down payment. This can make it harder to come up with the necessary funds to qualify for a mortgage.
What do the statistics say?
Now that we've looked at some of the ways that student loans can affect your ability to get a mortgage let's take a look at some statistics to see how prevalent this issue is.
According to a report by the National Association of Realtors (NAR), 53% of homebuyers under the age of 36 reported having student loan debt. Of those with student loan debt, 42% said that their debt delayed their home-buying journey by at least three years.
Furthermore, according to a report by the Federal Reserve Bank of New York, the average student loan balance for borrowers between the ages of 30 and 39 was $33,765 as of the first quarter of 2021. This represents a significant amount of debt that can impact a borrower's ability to qualify for a mortgage.
What can you do to mitigate the impact of student loans?
If you have student loan debt and are considering buying a house, there are several steps you can take to mitigate the impact of your debt on your home-buying journey. Here are a few ideas to consider:
1. Pay down your debt
One of the most effective ways to lower your DTI and improve your chances of qualifying for a mortgage is to pay down your debt. This can include paying off your student loans, credit card debt, or any other type of debt that you have. By lowering your debt, you can improve your chances of qualifying for a mortgage and may even qualify for a lower interest rate.
2. Increase your income
Another way to improve your DTI is to increase your income. This can include asking for a raise at work, taking on a side hustle, or starting a business. By increasing your income, you can offset the impact of your student loan payments and make it easier to qualify for a mortgage.
3. Consider refinancing your student loans
If you have high-interest student loans, consider refinancing them to lower your monthly payments and improve your DTI. Refinancing can also help you save money in the long run by reducing the amount of interest you pay over the life of the loan. However, it's important to carefully consider the terms of any refinancing offer to ensure that it's the right choice for you.
4. Save for a larger down payment
If you're struggling to come up with a down payment for a house, consider saving for a larger down payment. While this may take longer, it can help you qualify for a larger mortgage and may even result in a lower interest rate.
5. Seek professional advice
Finally, if you're unsure about how your student loans will impact your ability to buy a house, consider seeking advice from a financial professional or a mortgage lender. They can help you understand your options and guide you through the home-buying process.
Student loans can have a significant impact on your ability to buy a house. They can affect your debt-to-income ratio, credit score, and ability to save for a down payment. However, there are steps you can take to mitigate the impact of your student loans, including paying down your debt, increasing your income, refinancing your loans, saving for a larger down payment, and seeking professional advice. By taking these steps, you can improve your chances of qualifying for a mortgage and achieving your homeownership goals.