There are some ways you can make the process easier. Below, we’ll dive deeper into how student loans may impact your mortgage application, the income barriers you might face, and the mortgage programs available for student loan borrowers.
Income Barriers for Students Seeking a Mortgage
When you apply for a mortgage, lenders will consider your debt-to-income (DTI) ratio, which is all your monthly debt payments divided by your gross monthly income. It helps the lender measure your ability to make your monthly payments and repay your mortgage. Monthly obligations considered as debts might include student loan payments, alimony, child support, revolving accounts (such as credit cards), or car payments. The lower your DTI, the more attractive a borrower you are in a lender’s eyes. A lower ratio shows that debt eats a smaller portion of your income, so you have more money for your mortgage payments. However, unless you work full-time while you go to school, there’s a good chance your DTI is higher than lenders would like it to be. While this doesn’t necessarily mean a lender will deny your mortgage application, you may have to settle for a lower mortgage amount. “A student’s DTI often reduces the amount of mortgage loan they can take on" Jim Duffy, branch partner at Alcova Mortgage, wrote in an email to The Balance. “If they can’t find a home in a much smaller price range, they may be forced to continue to rent.”
How Student Loans Affect Mortgage Applications
Your monthly student loan payments are figured into the “debt” side of the DTI formula. Different lenders will see student loans differently. For example, for FHA loans, a 2021 change meant that the actual monthly student loan payment on your credit report contributes to the DTI formula, as long as it’s more than $0 per month. If your student loan monthly payment is $0, then lenders will factor 0.5% of your total student loan debt into your DTI. For conventional loans such as through Fannie Mae, borrowers on income-based repayment plans can qualify with a $0 payment, as long as they have documentation of that payment plan. For deferred loans or those in forbearance, the lender will factor 1% of the student loan balance if you’re paying $0 or less. Freddie Mac uses 0.5% of the total debt or your actual payment (as long as it’s more than $0).
Mortgage Programs for Borrowers With Student Loans
There are state mortgage programs specifically designed to help homebuyers with student loan debt. Here are a few examples.
SmartBuy 3.0 in Maryland
SmartBuy 3.0 is a program in Maryland that allows residents to buy a home and wipe out student loan debt simultaneously. As long as you have a 5% down payment, the Maryland state government will give you as much as 15% of the home’s purchase price or $30,000, whichever is lower, to pay off your student loans. To qualify, you must live in Maryland and meet other specific requirements.
Student Loan Assistance Grant in Newburgh Heights, Ohio
If you buy a home in Newburgh Heights, Ohio, you may be eligible for a grant of 50% of your student loan debt, up to a $50,000 maximum. This program requires that you purchase a single-family home for at least $50,000 in the Village of Newburgh Heights and live in it for at least 10 years after the grant is approved.
How To Buy a House as a Student
While buying a house as a student is no easy feat, it’s certainly possible. To turn your dream of homeownership into a reality, explore the requirements set by your local bank. Then come up with a game plan for improving your DTI. You may have to pick up a job or increase hours at your current job. If your DTI is high due to monthly student loan payments, investigate whether your payments are reported or calculated correctly. You could potentially qualify for a mortgage by using your actual debt payment amount, Duffy said, or by applying for an income-driven repayment plan with lower monthly payments. In addition, you might want to increase your credit score and save for a down payment, as most lenders will require a down payment. With some creativity and hard work, you may become a student homeowner. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
