Student loans can be a major roadblock when pursuing other financial goals, like buying a house. Lenders like to approve borrowers with minimal debt, mostly because taking on a second loan payment increases the risk of defaulting on one of the loans — or both. Beyond the challenges of getting approved, student loans can also make it harder to save for important things like a down payment, closing costs and moving expenses. However, there are ways to minimize the impacts of your student loans.
Key takeaway
While student loans will inevitably affect your debt-to-income ratio and make it harder to save up for a down payment, there are plenty of areas where you still have some control.
Do student loans affect buying a house?
Having student loans doesn’t affect whether or not you can get a mortgage. However, since student loans are a type of debt, they impact your overall financial situation – and that factors into your ability to buy a house.
There are a few different ways your student loans affect your finances, including your debt-to-income ratio, savings potential and credit score. All of these could contribute to your ability to buy a house.
Student loans add to your debt-to-income ratio
Lenders use the debt-to-income (DTI) ratio to determine your eligibility for a mortgage. DTI includes all of your monthly debt payments – such as auto loans, personal loans and credit card debt – divided by your monthly gross income. Student loans increase your DTI, which isn’t ideal when applying for mortgages.
Most mortgage lenders require your total DTI ratio, including your prospective mortgage payment, to be 45 percent or less, though it’s possible to find lenders that will accept a higher DTI. Having a high student loan payment, in addition to your other monthly bills, could push your DTI past the required threshold and make it harder to qualify.
Student loan payments hurt your ability to build savings
Buying a house requires an upfront down payment, usually totaling multiple thousands of dollars. If you have student loan payments, you may find it difficult to save for a down payment on top of your monthly student loan bills, which can easily delay your ability to buy a house.
For example, having a student loan payment of $400 per month means you are missing out on $4,800 in potential savings for a home each year. Depending on the home loan you choose and housing prices in your area, that amount of money could add up to a down payment in just a few years.
If you’re struggling to save for a down payment, you could explore low-down-payment loan options, such as government-sponsored loans. Instead of requiring the traditional 20 percent down payment, these programs can help you purchase a home with very little – or even zero – down.
Student loan payment history factors into your credit score
Payment history is the most crucial factor in your credit score, accounting for 35 percent of the total score. Borrowers with an on-time track record will see their score increase, while those who have made late payments on their student loans will see a reduced score. Consumers who have loans in default will also see a dip in their scores.
Mortgage lenders heavily weigh your credit score when determining your approval chances and your interest rate. If you’ve had trouble paying your student loans on time, your chances of qualifying for a mortgage could be hurt. You can reduce your chances of missing a payment – and negatively impacting your credit score – by turning on autopay.
The good news for borrowers? Credit bureaus generally give more weight to recent mistakes over past ones, meaning any mistakes you made at the beginning of your student loan repayment journey will have less significance over time.
Even though payment history is the most vital factor, other elements make up your credit score, including the total amount you owe, the length of your credit history and your credit mix. If you’re strong in these areas, it will boost your overall score.
Should I pay off student loans before buying a house?
If you’re like the average borrower paying off their student loans over a 10-year timeline, waiting to purchase a home until your loans are gone is probably a bad idea. Of course, this means the same is true if you’re paying off your student loans over 15 or 20 years, or if you’re currently paying them down on an income-driven repayment program.
There are several reasons you shouldn’t wait to buy a home if you’re ready, the biggest of which is the inevitable rise in housing prices over the last several years. Home prices hit all-time highs last year, and although they’ve cooled off in recent months, many markets are still up year-over-year. If student loan interest rates are hovering around 5 percent, it could make more sense to lock in a home now before prices increase even more – just be mindful that mortgage rates are still quite high.
This same concept applies to borrowers trying to save up a down payment for a home. With high prices and raging inflation, trying to save up 20 percent for a down payment becomes considerably harder.
With all this being said, it could make sense to pay off student loans before you buy a home in certain scenarios. If you can pay off student loans in one year or less and just want them out of your life, for example, you might want to stay the course and wipe them out as fast as possible. The same is true if student loan payments take up a significant portion of your monthly budget and a mortgage payment would add undue hardship.
Ways to buy a house with student loan debt
Plenty of people who buy a house also have student loan debt. A few ways to manage your student loan debt while buying a house include:
- Apply for down payment grants: Local and national down payment assistance programs can provide down payment grants to first-time homebuyers. These grants will cover part or all of your down payment. Borrowers usually need a credit score of 600 or more.
- Look into 0 percent down payment loans: Former and current service members are eligible for VA loans, which do not require a down payment. Those who buy homes in rural areas can also take out a USDA loan, which has a 0 percent down payment.
- Decrease your DTI: Because the DTI factors in only your monthly debt payments and not the total remaining amount, you can decrease the DTI by paying off some small debts quickly. You can also switch to a longer student loan repayment plan — such as an extended repayment plan or an income-driven repayment plan — to reduce your monthly student loan bill.
- Refinance your student loans: Borrowers who took out private student loans when interest rates were high should consider refinancing to a lower interest rate. Refinancing to a lower rate will save you interest and possibly decrease your DTI, making it easier to qualify for a mortgage.
The bottom line
Student loan debt may be part of your life for a decade or longer, but this doesn’t mean you have to wait to buy a home. The key considerations you’ll want to keep in mind are your credit score, your income, your other debts and the down payment you can save up before you start your search.
At the end of the day, your student loan payment is just another bill you have to pay each month. With some smart financial moves, your student loans don’t have to ruin your dream of homeownership.
