You might feel like your other financial goals are on hold while you pay down your student loan balance. But if owning a home is important to you, you might want to apply for a mortgage while you still have student loan debt.
Can You Get a Mortgage if You Have Student Loans?
You might be able to get a mortgage if you have student loan debt, depending on the overall strength of your application.
Student loans mainly affect your mortgage application by increasing your debt-to-income (DTI) ratio. DTI equals your total monthly debt payments (including your rent or mortgage) divided by your gross (before-tax) monthly income. Lenders use this figure to evaluate how much you can afford to spend on a mortgage payment.
Student loans also show up on your credit report, so they can affect your credit score. They can increase your total debt burden and credit utilization ratio, and late or missed payments on student loans impact your payment history.
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How to Buy a Home With Student Loans
To get a mortgage while you have student loan debt, you’ll likely need to plan ahead.
Leslie Tayne, managing director of Tayne Law Group, recommends that prospective homebuyers speak with a lender to get personalized advice on improving their application.
“They’ll take a look at your credit score, and they’ll be able to tell you, ‘All right, here’s where your weakness is. This is what our bank and our underwriting is looking for,'” Tayne says.
The following strategies could help boost your chances of qualifying.
— Pay off other debt. This reduces your DTI and frees up cash for a mortgage payment.
— Change payment plans or refinance. You might be able to improve your DTI by choosing a student loan repayment plan with a lower monthly payment.
— Take advantage of a seller-paid rate buydown. Asking a seller to buy your rate down could get you a lower payment than negotiating a price break.
— Improve your credit score. Limit credit usage, make sure all accounts are current and ask for errors to be removed from your credit report to raise your credit score and help you qualify for a mortgage.
— Sell assets you’re not using. You can make a larger down payment or pay off debts with the proceeds.
— Look for down payment assistance programs. That can free up money for debt reduction. Or use the extra funds to buy your rate down or make a larger down payment – either tactic would lower your monthly mortgage cost.
— Buy with friends or family. A co-signer who has steady income and little debt could make your application more attractive to lenders.
— Buy a multi-family property. You could purchase a property to share with a co-borrower or rent out the rest of the space. “In some loan programs, we can even use that projected rent from the other units to help qualify them,” says Samantha Jackson, mortgage loan officer at Extraco Mortgage.
How Student Loan Repayment Plans Affect Your Mortgage Application
If you’re getting turned down by lenders because of a high DTI, entering an income-driven repayment (IDR) plan could help. If switching to an IDR plan lowers your monthly payment, this could improve your DTI and increase your chances of approval.
However, if your income is so low that the repayment plan gives you a $0 payment, some loan programs will still include at least part of your student loan debt in your DTI. Therefore, it’s a good idea to talk to a loan officer to see if a repayment plan will help or hurt your application.
Best Mortgage Programs for People With Student Loans
Mortgage programs that allow low down payments or that minimize the impact of student loans on DTI can be good options. Here are some programs to consider.
Fannie Mae HomeReady
If your income is less than 80% of the area median, you might qualify for a HomeReady loan. This program allows down payments as little as 3% and a DTI up to 50%. HomeReady allows you to use gifts, grants or Community Seconds toward your down payment
Lenders use your credit report or most recent student loan statement to verify your monthly student loan payment. If you have an IDR plan with a $0 payment, the lender can accept it and calculate your DTI accordingly. But if your loan is deferred or in forbearance, the lender must include a payment of at least 1% of your outstanding balance in your DTI.
Freddie Mac Home Possible
Home Possible is Freddie Mac’s loan program for homebuyers with income up to 80% of the area median. The down payment can be as low as 3%, and you can fund it with gifts and other sources. The program allows co-borrowers, even if they won’t live in the home, and you can even use rental income from roommates to qualify.
The maximum DTI for Home Possible loans underwritten manually (by humans) is 45%. However, most loans are underwritten by automated systems. In that case, the software bases your maximum DTI on the strength of the file – your credit score, down payment size, reserves and other factors.
Typically, the student loan payment listed in your credit report counts in your DTI for a Freddie Mac loan. When that’s $0, though, lenders must include 0.5% of the loan balance as the monthly payment. In addition, if you’re in an IDR plan and you’re going to have to recertify your income, or your payment is set to change before your first mortgage payment is due, the lender must include either the new payment or .5% of your outstanding balance – whichever is more.
Freddie Mac HomeOne
HomeOne is open to first-time homebuyers and, unlike Home Possible, it doesn’t come with income limits. The down payment can be as low as 3%. However, this program only allows co-borrowers if they will live in the home as their primary residence.
Freddie Mac’s student loan guidelines apply to this program too, so lenders will have to include a monthly payment equal to 0.5% of your loan balance in your DTI if your monthly student loan payment is $0.
[READ: Today’s FHA Mortgage Rates]
FHA
FHA loans have more flexible credit underwriting than most programs, and the program allows relatively low down payments. You can put down as little as 3.5% if your credit score is 580 or higher, and 10% with a score between 500 and 579. It’s possible for highly-qualified applicants to get approved with DTI over 50%.
The FHA student loan guidelines state that if your student loan payment is above $0, FHA lenders count the payment on your credit report or statement toward your DTI. Otherwise, lenders must use 0.5% of your loan balance when qualifying you.
VA
VA loan guidelines state that 41% is “acceptable” for VA loans, though lenders are allowed to approve loans with higher percentages if you have enough “residual income.” That’s money left over after paying expenses. Your residual income requirement depends on your family size and where you live.
VA underwriting guidelines state that lenders don’t need to count deferred student loans toward your DTI ratio if your loan will be in deferral for at least 12 months after you close on the mortgage. If you’re in a repayment plan or if your loan will be out of deferment within 12 months of closing, lenders must use the payment listed in your credit report or 5% of the loan balance divided into 12 monthly payments, whichever is greater.
USDA
The USDA offers two types of mortgages for homebuyers in eligible rural areas.
USDA Direct loans are open to homebuyers with low income who lack safe housing. Down payments are not usually required. The interest rate is capped at 4.875%, and it can be as low as 1% with payment assistance. Loan terms can be up to 33 years, or 38 years for borrowers with very low income. To qualify, your DTI must be no higher than 41%.
If your credit score is at least 640 and other conditions are met, the USDA counts your actual student loan payment toward DTI, even if you’re in a repayment plan and the payment is $0. Otherwise, 0.5% of your outstanding student loan balance is used.
USDA Guaranteed loans are open to homebuyers whose income is no higher than 115% of the median household income for their area. You typically don’t need to make a down payment. Interest rates are determined by lenders, and the loan term is 30 years. As with USDA direct loans, the maximum DTI is 41%.
Lenders must apply the student loan payment listed on your credit report toward DTI. If the payment is $0, lenders include a monthly payment of 0.5% of the outstanding loan balance.
Professional Mortgages
Some lenders offer professional mortgages for doctors and others in high paying occupations who often start their careers with large student debt loads. Professional mortgages are portfolio loans, so qualification requirements vary by lender.
“It’s a fantastic option because most of those programs will allow you to not count that student loan payment in their debt-to-income ratio,” Jackson says.
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How to Buy a Home When You Have Student Loans originally appeared on usnews.com
