Loan officers break down what you need to know about student debt and owning a home.
Student loans are undoubtedly a daunting financial obstacle, so it’s only natural to feel like they’re holding you back from owning a home. But buying a house with student loan debt is possible. Whether or not you should get a mortgage with student loans will depend on the amount of debt you have and what your personal financial situation looks like, including factors like your income, savings and credit score.
Steven Park and Kathy Argento, mortgage loan officers with Zillow Home Loans, both say owning a home while paying off student loan debt is far more common than many might think.
“If you have a stable source of income and can manage your finances, student loan debt shouldn’t stop you from home ownership,” Park says.
Minimum payments for student loans can bevery manageable alongside a mortgage payment, Park adds, depending on how much you owe. And while being debt averse and wanting to pay everything off might seem like the responsible thing to do, it may ultimately lead to missed opportunities.
We asked Park and Argento some of the biggest questions about buying a home while paying off student debt.
Can you get a mortgage with student loans?
It’s not uncommon for a first-time home buyer to have anywhere from $30,000 to $100,000 in student loan debt and still qualify for a mortgage, Park says. “We approve people with student loan debt all the time,” Argento adds.
Like any other kind of debt, the student loans will simply be part of an applicant’s total debt obligations and credit profile for qualifying purposes. The same considerations apply to car payments, credit card payments and any other personal loans. “It just simply must be counted into their debts,” Argento says, “whether or not they are currently deferred.”
Argento emphasizes, carrying student loan debt should not prevent you from considering buying a home. Instead, talk to your loan officer about how your student loan payments may factor into your application.
Factors that impact buying a house with student loans
Here are some important factors your loan officer may review with you.
Your debt-to-income (DTI) ratio
A debt-to-income ratio is the percentage that compares your monthly debt payments to your monthly gross income, giving you a realistic perspective on what you can and can’t afford.
A DTI ratio of 36% or less is generally considered ideal because it will show your lender that you’re not overstretched financially. That said, many lenders will lend with DTI ratios higher than 36%, depending on the borrower’s credit profile, desired loan amount, and other factors. You can use Zillow’s DTI calculator to get a realistic estimate of your personal debt-to-income ratio.
Argento says outstanding student loans have the potential to reduce your purchasing power, depending on the broader financial situation you’re facing. “You should consider paying off your student loans if your debt-to-income ratios are so high, they prevent you from buying a home at your desired price point,” she says.
But they also might not be hurting your purchasing power at all. It depends on your income, the actual purchase price of the home, any other debts you might have on your credit report and the cost of your new monthly house payment.
Your credit score
Loan officers will consider your credit score when you apply for a mortgage. Paying student loans on time can affect your credit score, which is why it’s important to make timely payments to keep your score strong.
Your savings
When money that you would normally put into savings is going to your monthly debt payments, it can be harder to save for other things — like a down payment or closing costs on a home. Some mortgages do require as little as 3% for a down payment — or even 0% down with a VA loan — but the more you have saved, the more flexibility you’ll have when it comes to purchasing power.
While it may not seem that way, saving for a down payment can still be an option while you’re paying off student loans. Budget and allocate money to buckets that make sense for your lifestyle, so that you can pay down your student loan debt and also reach your home buying goal. Here are 21 creative ways to save.
How to buy a house with student loan debt
Before diving into the process, do yourself a favor and get pre-qualified so you can see exactly how your student debt might affect which loans you do and don’t qualify for.
Once you’ve done this, there are other steps you can take to move the process along.
Check your credit score and work on improving it if needed
Your credit score is an important part of whether or not you’ll be eligible to buy a home. If you went through a period of time where you weren’t able to pay off your loans and they’re damaging your credit score, look for additional ways to improve your score. For example, focus on paying your credit card bills on time.
If you want more information on how your credit score affects qualifying for a mortgage, check out these Zillow resources that outline how your credit score is calculated and exactly what kind ofcredit score you’ll need if you’re considering buying a house.
Aim to decrease the number of debts you owe
Say goodbye to as much debt as you can. This will help improve your DTI, which ultimately affects which homes you will and won’t be able to afford. Pay off any manageable outstanding debts — like small credit card bills, medical bills or outstanding car payments.
Tackling other debt before you take on a mortgage will help set you up for homeownership success. Learn about more ways to pay off debt.
Gut check your financial situation and assess if you can afford to buy a home
Zoom out and take a look at your current budget and projected monthly and annual income before you decide to add a mortgage and other homeownership costs to your spreadsheet. If you don’t know where to begin, Zillow’s affordability calculator can be a good starting point.
Looking at your bank accounts, your current pay and your projected pay is a helpful way to indicate whether or not owning a home will feel manageable to you.
Consider first-time home buyer or DPA programs
There are first-time home buyer programs, including down payment assistance (DPA) programs, that may help make financing a home more attainable, especially if you’re managing paying off student loans.
Zillow’s guide to first-time home buyer programs will help give you more information on resources you should look into as you explore your options.
Can I buy a house with more than $100K in student loan debt?
Whether or not you can buy a house with more than $100K in student loan debt will depend on your total financial picture. Debt is all relative to the stability and size of your income, Park says. “Luckily, the mortgage industry will prevent someone from overburdening themselves with payments that are too high relative to their income,” he adds.
To decide whether you qualify for a mortgage, lenders will determine your student loan payment based on your credit report and then factor that into your DTI. Your DTI will help determine the maximum loan amount you would qualify for.
Once you take a look at what you can afford based on your current income and monthly student loan payments, you can decide if there’s an alternative path that might help you achieve your home buying goal. Mortgage loan officers won’t be able to give you financial advice, so you should consider speaking to a financial advisor for some clarity on your options.
For example, financial experts might point to income-driven repayment plans to help you optimize your income and monthly student loan debt — and ultimately, your DTI — in a way that may benefit you when you apply for a mortgage. You might actually be paying more towards your student loan than you need to be, based on how much money you’re making and how much you owe, and an income-driven repayment plan can help resolve that, ultimately making your payments more manageable and an ideal mortgage within reach.
Should you pay off student loans before buying a house?
When considering whether to buy a house or pay off student loans, it’s important to look at where you live and where you stand financially. “Home ownership is not for everyone at every stage of their lives,” Park says.
If you’re able to afford it, buying a home in today’s rising market is still a favorable investment as homes continue to increase in value, Argento says. “Why pay rent at 100% interest when you can buy a home which will increase in value over time?” she explains. “I have never heard of anyone saying they wish they did not buy a home when they did. Homes continually increase in value over time and will always be a solid investment.”
You have to ask yourself: Do I have what it takes to pay the down payment? Can I afford the monthly payment? Will I be able to continue to make the same payment for the next 10 years? “If you can answer yes to all of these questions, you will most likely benefit from owning a home, and you should start looking for a house,” Park says.