How Does Carrying Student Loan Debt Affect Your Ability to Qualify for a Home Loan?

Student loans affect a consumer’s ability to get a mortgage in that they are a liability that factors into your debt to income ratio and your credit score. The more student loan debt you have and the larger the monthly obligation on those loans is, the worse your debt to income ratio will be. Student loans also impact a consumer’s credit worthiness via reported payment history and length of time accounts have been established. Newer student loans will be worse for your credit, while student loans that have established for quite some time and are nearly paid off will have a positive impact on your credit.

Other Considerations for Homebuyers Carrying Student Loan Debt?

Although you want to have “seasoned savings” when applying for a mortgage, Debt to income is the most important thing to consider in regards to qualifying for a mortgage., because it shows lenders how much disposable income you have and whether or not you can afford the home loan. You can have exceptional credit, but if you do not meet DTI requirement you will not be able to qualify for a mortgage. Simply for the fact that you do not have enough income to afford your mortgage payment. Rule of thumbs vary by state since housing prices and demand for real estate vary so significantly across the US. However, a good rule that can generally be applied nationwide, is that your mortgage payment should not make up more than 30% of your gross monthly income. This rule of thumb is also highly reflective of how lenders approve potential home buyers, so basing your finances off how lenders approve mortgage borrowers is always the best bet here.

Can Refinancing Help?

Refinancing can definitely help make student loans more manageable when buying a home. If the end goal is improving your DTI, refinancing your student loans may be a great option to do so. However, with rates where they are currently, you might not be getting the best opportunity to refinance in the current market.

Additional Tips

Lower Utilization Rate

In order to get the best interest rate possible, your ultimate goal should be to show a 0% utilization rate on all credit card accounts, especially before applying for a mortgage and doing the hard credit pull. The best thing for anyone buying a home to do before they do that hard credit check is to make sure they are reporting a $0 balance to Transunion, Equifax and Experian on all revolving lines of credit and credit cards. This way they know that are showing the maximum amount of available credit on the date of the report and a 0% utilization rate. Also, it’s important to note that once you do a hard credit check, you have 60 days to shop around with lenders and find the best possible interest rate.

Finish paying down any installment loan accounts, auto loans or student loans that are close to paid off. If student loans are preventing you from achieving a good DTI then you should definitely consider trying to eliminate some student loans early. The key here is to eliminate each account in full so that the monthly expenditure is not weighing on your DTI. Paying down a little of each of your student loans will not be a solution. In this scenario, you should devote lump sum payments towards completely eliminating each student loan balance to $0, one by one. Alternatively, you can consolidate your student loans into a longer amortization. This will lower your monthly liability on the loans but will also mean you will be paying down the student loan debt for longer.

There are also many pros and cons associated with cosigning on a student loan so this is also something to consider.