How To Buy a Home When You Have Student Loan Debt

Paying off student loans takes time, but you don’t need to wait until they’re paid off before buying a home. While the amount of debt you have may affect your ability to get a mortgage, it’s possible to make your homebuying dream a reality while still chipping away at your student loan balance.

The Basics of Student Loan Debt

Student loan debt in the United States has grown significantly in recent years, rising from $520 billion in 2006 to $1.76 trillion in 2022. The average borrower owes $37,718 on their loan — and an estimated 43.6 million borrowers carry student loan debt.[1]

This has affected many people’s ability to buy a home. According to a 2021 study from the National Association of Realtors:

• Nearly one-quarter of all homebuyers and 37% of first-time homebuyers have student debt.
• Of all student loan holders, 51% say that their debt delayed their ability to buy a home.
• More than a third of student loan borrowers, 36%, say their debt delayed their ability to move out of a family member’s home.

Concerns about students accumulating such large debts have prompted calls for the government to forgive federal student loans. President Joe Biden canceled $9 billion in student debt in October 2023 to assist people who are most at risk of being unable to repay their loans. This came shortly after the Department of Education ended a three-year pause in payments on eligible loans due to the COVID-19 pandemic.

How Student Loans Affect Your Mortgage

Even before you apply for a mortgage, making student loan payments every month can make it more difficult to save up for a down payment on a home. A larger down payment generally helps you get a better interest rate on your loan. If you make a smaller down payment, you’ll likely end up with a more expensive mortgage. And with conventional mortgages — the most common type of loan — you’ll have to pay for private mortgage insurance if your down payment is less than 20% of the home’s purchase price.

Student loans also affect your debt-to-income ratio, which reflects how much of your monthly income is taken up by your debt payments. This helps mortgage lenders determine whether you can afford the loan payments. You can calculate your DTI ratio by adding up your monthly debt payments, dividing that number by your gross monthly income, and multiplying by 100 to get a percentage. A lower DTI ratio is better — in many cases, lenders will not approve you for a loan if your DTI ratio exceeds 43%.

Another way student loans can affect your ability to get a mortgage is if you default on your student loans. That lowers your credit score, and most loan types and lenders require a minimum credit score to get a mortgage.

In the end, lenders see no difference between student loan debt and other types of debt.

“If your payment history is great on your student loans, and you can support the student loan payments on your debt-to-income ratio, they don’t have any additional impact on qualification,” says Jonathon Kollman, vice president of sales at AmeriSave Mortgage Corp. in Plano, Texas. “Lenders do not see this as a ‘bad’ debt.”

How To Get a Mortgage When You Have Student Loans

Even if you have student loans to pay off, you still can qualify for a mortgage. Here are some ways to increase your chances of getting a loan.

Decrease your DTI ratio

Lenders want to know how much of your income is taken up by debt payments. They are less concerned about the total amount of debt you have, or what type of debt you have, than how much it costs you each month to repay it.

If your DTI ratio is too high, paying off existing debt before taking out a home loan could help boost your odds of approval. Increasing your income — like getting a raise at work or starting a side hustle — also could achieve this goal. The name of the game is proving to lenders that your other debts won’t get in the way of your ability to afford the monthly mortgage payment.

Both student loan debt and credit card debt affect your DTI ratio. However, you’ll find that credit cards typically come with higher interest rates. From this perspective, paying down credit card debt first could help you pay less interest overall.

“Credit card debt is always the first debt you should pay down,” Kollman says.

Increase your credit score

Your credit score influences whether you’ll be approved for a mortgage, as well as the interest rate you get. Borrowers with high credit scores usually get the lowest rates, while those buying a home with no credit or poor credit will pay more.

These are some ways to increase your credit score:

• Establish your credit history. Having open and active accounts in good standing will help you prove yourself as a trustworthy borrower.
• Make payments on time. A long history of timely payments is key to getting a higher credit score. Be sure to pay attention to all your debts, not just your student loans.
• Pay off overdue bills. Late payments can reduce your credit score, so catch up on your bills if you’ve fallen behind.
• Pay down credit card debt. Maintaining a low balance on your credit cards relative to their limits can result in a higher credit score.

Check out different loan types

Conventional conforming mortgages are the most common loan type. They have standard requirements for the down payment, credit score, and DTI ratio. If you don’t qualify for one, other types of mortgages with more lenient requirements due to government backing may be a good alternative.

Here’s a look at some government-backed loan options:

• FHA loans. These mortgages are backed by the Federal Housing Administration and allow for down payments as low as 3.5%, plus lower minimum credit scores compared with conventional loans.
• VA loans. This loan type is backed by Veterans Affairs and available only to active-duty service members, veterans, and their surviving spouses. A VA loan allows qualified borrowers to make a low down payment or no down payment.
• USDA loans. The Department of Agriculture backs these loans for low-income borrowers buying homes in rural areas. No down payment is required.

Keep in mind that these types of mortgages may cost more than conventional loans in the long run, so make sure to fully explore your options.

Consider finding a co-signer

If a trusted family member is in a secure financial position and willing to help, applying for a mortgage with a co-signer could increase your approval odds. A co-signer agrees to take responsibility for repaying the loan if you are unable to do so. Having a co-signer can help borrowers who are still paying off their student loans qualify for a mortgage.

Is It Worth Buying a House When You Have Student Loans?

If you’re in no rush to buy a home, it might make sense to hold off on applying for a mortgage until you’ve paid down your student loans. Waiting also will give you more time to lower your DTI ratio, boost your credit score, and save more money for a down payment. The combined effect could help you get a loan with a lower interest rate, which will save you money overall.

On the other hand, buying a home before paying off your student loans allows you to start enjoying the long-term financial benefits of homeownership — like building home equity — sooner.

The Bottom Line on Buying a House With Student Loans

Student loan debt doesn’t automatically disqualify you from getting a mortgage and buying a home, but it could make the process challenging and more expensive. Depending on your financial situation, it might make sense to focus on paying down your student loans — and any other debts — before buying a home. But if you have excellent credit, a sizable down payment, and a low DTI ratio, there’s no reason you can’t buy a home — even with student loan debt.