You want to buy a house, but you’re worried you won’t qualify for a mortgage because of your student loan debt. You’re not alone. Half of non-homeowners (51%) say student loan debt is delaying them from buying a home, according to a survey from the National Association of REALTORS®. That number jumps to 60% for millennials.
The numbers tell an ugly story of a generation paying for its education long after graduation. The average public university student borrows $30,000 in student loans to get a bachelor’s degree, according to the Education Data Initiative. The average student loan payment is $460 a month. And nearly 48 million people have student loans.
Despite uncertainty about debt cancellation timing and impact, you can get a mortgage while you have student debt. Here are eight tips for making it happen.
Your debt-to-income ratio is one of the most impactful numbers. It measures the percentage of your monthly income that goes to pay your debts. You calculate it by adding all your monthly debts – credit card minimums, rent or mortgage, car payments, and, yes, student loan payments. Then, you divide the total by your monthly gross income (take-home pay before taxes and other monthly deductions).
Your debt-to-income ratio should be no more than 45% of your gross monthly income. Many lenders consider the ideal debt-to-income ratio, including a mortgage payment, to be 36% or less. Depending on your credit score, savings, assets, and down payment, lenders may accept higher ratios, according to Bankrate. It depends on the type of loan you're applying for.
You can improve your debt-to-income ratio three ways: Make more money, spend less money, and pay down your debt. Not everybody can wake up tomorrow and say, ‘Oh, well, I’m going to get a job that pays $4,000 more a month”. Sure, there are always side hustles to bring in extra bucks to help you pay down bills. The surest way to improve your debt-to-income ratio is to live within your means.
And pay down those student loans.
Your credit score is the other number that profoundly affects your financial fortune. It’s basically a grade for what kind of a job you do paying your bills. The simplest ways to boost your credit score include paying your bills on time, using less than 30% of the credit limit on your credit cards and paying off debts. There’s a lot of help out there, including free webinars, to guide you on improving your score. Generally, these tips involve paying off bills and spending less money. Y
When you’re paying off student loans, saving for a down payment can be tough. The down payment can range from 3.5% to 20% of the home purchase price. If you don’t have a relative who can dump a chunk of cash on you – known as gift money – there's other help. Down payment assistance programs offer loans or grants that pay the down payment on a house. Some DPA funds can be used toward closing costs, too.
Most DPAs require you to be a first-time home buyer with a credit score of 640 or higher and a moderate source of income. DPAs are usually offered at the local level, and their eligibility rules vary by state, city, or even ZIP code.
Want to instantly improve your chances of getting a mortgage? Put a co-borrower on your mortgage. Their income counts toward the debt-to-income ratio, and their credit history bolsters yours. You’re combining forces to strengthen your financial qualifications, and that can offset the dead weight of your student loan debt.
Most co-borrowers are family members or someone with whom the homeowner has a personal relationship. But lenders don't require a co-borrower to produce proof they know you or are related to you. They just want proof the co-borrower can pay your mortgage if you don't.
Remember, a co-borrower will share title on the home.
You could be eligible for loan forgiveness, if you’re a teacher, attended a for-profit school that went out of business, or have a total and permanent disability. Here are the programs erasing student debt: .
Some companies are offering student loan repayment assistance as a benefit. Google matches employee payments up to $2,500 a year; Aetna matches up to $2,000 a year with a lifetime cap of $10,000; and Fidelity Investments pays up to $10,000 of an employee’s student loans. Other companies that offer payment assistance include Carvana, Chegg, Hulu, Lockheed Martin, New York Life, and PwC (PricewaterhouseCoopers).
Employer-sponsored student loan repayment may become more common. The Coronavirus Aid, Relief and Economic Security (CARES) Act of 2021 gives a tax break to companies that offer student loan repayment assistance. From now till Dec. 31, 2025, employers can contribute up to $5,250 a year tax-free to an employee for repayment of student loans. So, if your boss gets on board this year, you could get as much as $15,000 of your loans paid off before the program ends.
You can do this in one of two ways:
Look for someone who is experienced at working with borrowers who have more student debt than they’d like. Get a broker who will work with you to find DPA programs; steer you through the ins and outs of FHA, conventional, and VA loans. And help you get your finances in order, so you become a better mortgage candidate.
And we'll be with you the whole way until the time is right for you!