Do Student Loans Affect Buying a House? Getting a Mortgage with Student Loans

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.

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.

Do student loans affect buying a house?

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 when reviewing your mortgage application.

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Front-end DTI ratio

Your 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 $4,000 and the lender anticipates your monthly homeownership expenses will be $1,000, 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 ratio

While 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 loan debt affects your back-end DTI. And this is 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 limits

To qualify for a mortgage, you’re typically going to need a front-end ratio of no higher than 28% and a back-end ratio of no higher than 36% (referred to as 28/36). But certain loans will allow higher limits:

• Conventional loans are typically 28/36.
• Federal Housing Administration (FHA) limits are currently 31/43, though these can be higher under certain circumstances.
• U.S. Department of Veterans Affairs (VA) limits are only calculated with one DTI of 41.
• U.S. Department of Agriculture (USDA) limits are 29/41.

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 45% 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 ratio

Let’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 Conventional Loan eligibility 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 costs could be to helping you get mortgage approval.

How to improve your back-end DTI ratio

If 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 payment

If 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.

Related: The Great Debate: Physician Loan vs. Saving for a Down Payment

2. Switch to an income-driven repayment (IDR) plan

If all, or a large majority, of your student loans are federal student 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 your personal finances.

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 Saving on a Valuable Education (SAVE) — formerly REPAYE — could help you do that.

3. Refinance your student loans

Depending 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 or need forbearance.

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 in your student loan repayment but possibly also help you qualify for a mortgage.

Related: Check out our free calculator to see how much you could save by refinancing.

How new Fannie Mae student loan guidelines could help

In 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.

1. Debt paid by others

If 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 calculation

As 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 deferment

Unfortunately, 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 amount 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 help

If 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 a more expensive loan type.

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. Learn more about FHA Student Loan Guidelines.

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 and consider closing costs and all fees.

You may also 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.