Do you want to buy a house but think your student loans will stop you from getting a mortgage? Don’t give up your dream of homeownership just yet! More and more people with student loan debt have been able to achieve homeownership – and there are several loans and programs that may be available to you. Here’s what to consider:
First things first: Your debt-to-income ratio
One of the biggest hurdles to getting a mortgage while carrying student loan debt is your debt-to-income ratio (DTI). It’s essentially your total recurring monthly debt divided by your gross monthly income.
Lenders consider two types of DTI ratios. Lenders consider a front-end DTI ratio, which calculates the amount of monthly gross income spent on housing expenses, such as principal, interest, taxes, and insurance.
Lenders also calculate a back-end DTI ratio, which calculates the amount of monthly gross income that goes towards all monthly debt payments, including housing, student loan debt, car payments, and credit card bills.
Different lenders have different standards for how high your ratios can be and still qualify for a loan. Our Purchase PowerTM calculator will help you estimate your front-end and back-end ratios, plus how much house you can afford.
For some tips on how to improve your debt-to-income ratio, click here.
Check out recent changes
People participating in income-driven repayment programs for federal student loans may now have an easier time getting a mortgage backed by Fannie Mae. If your payment under an income-driven replacement plan is $0, this is the payment that is considered in your DTI ratio, and not the standard payment you would have paid if you weren’t in the income-driven plan. Prior to 2017, it was unclear which payment should go into the DTI ratio calculation.
More help for homebuyers
- If you have student loan debt, FHA loans can have higher back-end ratios than conventional loans, which can make them easier to acquire. You may be able to get an FHA loan with a credit score as low as 580 and a down payment as low as 3.5%.
- If you qualify for a VA loan, that can be a game-changer, too. These mortgages make homes affordable for the men and women who have served our country (if eligible) and offer a no down payment option.
- There are also programs that give first-time homebuyers help with their down payments and closing costs. Since a larger down payment reduces the amount you need to borrow, these programs might help improve your DTI, too.
See? It’s not as overwhelming as you probably thought to be approved for a mortgage with student loan debt. And once you’re ready to take the next step, give this a read: Your Crash Course to First-Time Homebuying.
Ditech is not a financial advisor and the ideas outlined above are for informational purposes only. They are not intended as investment or financial advice and should not be construed as such. Consult a financial advisor before making decisions regarding important personal financial matters, and consult a tax advisor regarding the deductibility of interest and tax implications.