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How to Qualify for a Mortgage With Student Loans
Updated On January 11, 2022
Editorial Note: This content is based solely on the author's opinions and is not provided, approved, endorsed or reviewed by any financial institution or partner.
Student loans are often necessary to get a college degree or graduate degree, so they’re considered a smart investment. When it comes time to buy a house, however, many student loan borrowers may wonder how student loans impact your ability to get a mortgage.
Lenders evaluate several criteria when you apply for a mortgage. This can include, for example, your student loans and other debt compared to your income. That said, it’s still possible to get a mortgage and buy a home, even if you have student loans.
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In this guide, we will explore:
- How to get a mortgage with student loans
- How to increase your chances of getting a mortgage
- How to pay off student loans
- How to use student loan refinancing to get a mortgage
How to get a mortgage with student loans
If you have student loans, the good news is that you can still get approved for a mortgage to buy a home. This is despite concerns from student loan borrowers who say student loan debt is one of the main reasons they have delayed buying a home, getting married or starting a family. To get approved for a mortgage with student loans, you need to demonstrate to your lender that you have sufficient monthly cash flow to pay for your mortgage, student loans, any other debt and your living expenses. One way that lenders evaluate your ability to afford a mortgage is your debt-to-income ratio.
Before applying for a mortgage, make sure to compare the latest mortgage rates and lenders to find the best home loan for you.
Debt-to-income ratio
Your debt-to-income ratio compares your monthly debt payments with your gross monthly income. Lenders will especially focus on your mortgage payments, but they also may evaluate your other debt obligations such as student loan debt or credit card debt, for example. Your monthly debt payment for a mortgage may include your principal payment, interest payment and any private mortgage insurance (PMI) that you may be required to pay if your down payment is less than 20% of the value of your home.
This mortgage calculator shows you your estimated monthly payment when you get a mortgage.
To get approved for a mortgage, lenders typically prefer to have borrowers with a lower debt-to-income ratio. Typically, 43% if the highest debt-to-income ratio that borrowers can have to get approved for a mortgage. However, lenders prefer a mortgage borrower to have a debt-to-income ratio less than 36%, with no more than 28% being applied toward a mortgage payment or rent payment. That said, each lender may have its own underwriting criteria and consider debt-to-income ratios differently when approving a mortgage.
How to increase your chances of getting a mortgage
There are many steps that you can take to increase your chances of getting a mortgage. Each lender may evaluate separate criteria, but here are some common factors that could help determine if you get approved for a mortgage and what the cost will be:
- Your income
- Your debt
- Your credit score
- Your payment history
- Purchase price
- Amount of down payment
- Mortgage repayment period
To get a mortgage with the lowest rate, you will want a high credit score, history of financial responsibility, and a low debt-to-income ratio. Here are some strategies you can implement to improve your changes of qualifying for a mortgage with student loans:
Increase your income
If you can earn more money, it will improve your debt-to-income ratio. You can ask for a raise, get a bonus, or even start a side hustle. You might even consider getting a cosigner to help you get a approved for a mortgage and get a lower interest rate.
Decrease your debt
If you can lower your debt, this will also help improve your debt-to-income ratio. By paying off more debt, you will have more free cash flow each month that can be applied toward your mortgage. Lenders prefer to have borrowers with more monthly cash flow available to pay off debt because it decreases the risk of default.
Increase your credit score
You can also increase your credit score to show lenders that you are a responsible mortgage borrower. Lenders prefer to have borrowers with a higher credit score with a demonstrated history of financial responsibility. Two ways that you can demonstrate your financial responsibility by making on-time payments and not skipping any payments. You can also make sure you pay off your credit card balance in full each month. In a given month, ideally you will have a low credit card utilization ratio, which is the amount you charge on your credit card as a percentage of your total credit limit.
How to pay off student loans
To qualify for a mortgage, it may be helpful to pay off student loans faster. You don’t have to pay off all your student loans. However, there are several steps you can take to lower your student loan payments. Here are some examples:
Make an extra student loan payment
You can make an extra student loan payment to pay off your principal student loan balance faster. This extra payment student loan calculator shows you how much you can save when you make an extra lump-sum student loan payment. In addition to an extra lump-sum student loan payment, you can also increase your regular student loan payment by any amount. The incremental payment or monthly amount can be applied to reduce your principal student loan balance.
Enroll in an income-driven repayment plan
Another way to pay off student loans is to enroll in an income-driven repayment for your federal student loans. There are four main income-driven repayment plans:
- Icome-Based Repayment (IBR)
- Pay nAs You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-Contingent Repayment (ICR)
An income-driven repayment plan sets your monthly student loan payment based on discretionary income, family size and state of residence. With an income-driven repayment plan, you can get a monthly student loan payment as low as $0. Therefore, an income-driven repayment plan can help lower your monthly payment and improve your debt-to-income ratio.
Get student loan forgiveness
Another way to qualify for a mortgage with student loans is through student loan forgiveness. There are multiple options for federal student loan forgiveness that can lower your student loan debt. One popular example is the Public Service Loan Forgiveness program, which Congress created in 2007. This program forgives federal student loans for student loan borrowers who work for a qualified public service or non-profit employer and make 120 monthly student loan payments. You will need to enroll an income-driven repayment plan and make at least a majority of your federal student loan payments for public service loan forgiveness through an income-driven repayment plan.
This public service loan forgiveness calculator can help you determine which income-driven repayment plan can maximize student loan forgiveness for you.
How to use student loan refinancing to get a mortgage
Student loan refinancing is a helpful strategy that can help you get a lower interest rate, a lower monthly payment, or both. Student loan refinancing is the process of getting a new student loan with a lower interest rate from a private lender and using that new student loan to pay off your old student loans. You can choose a fixed or variable interest rate and student loan repayment period from 5 to 20 years. This student loan refinancing calculator shows you how much money you can save when you refinance student loans. Student loan refinancing can help lower your monthly student loan payment, which can improve your debt-to-income ratio and help you qualify for a mortgage. It’s advantageous to complete student loan refinancing before you apply for a mortgage, but you shouldn’t apply for student loan refinancing while a lender is evaluating you for a mortgage. If student loan refinancing lowers your monthly payments, you also may find it easier to pay student loans each month. Over time, this can improve your payment history, which too can increase your credit score.
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