How Student Debt Impacts Home Buying

A recent BankRate.com survey confirmed what many suspect: some young adults have postponed home buying due to their student loans. This echoes a commonly held belief that if you have student loans you can’t get a mortgage.

But these two activities aren’t mutually exclusive. Here’s what you need to know about how your student debt impacts your ability to buy a home.

1. It isn’t the amount of debt owed, but your capacity to repay that matters.
Mortgage application approvals are heavily influenced by a simple calculation: debt-to-income (DTI). Lenders prefer to see DTIs of 43% or less.

A DTI ratio is calculated by adding up all monthly payments on car loans/leases, student loans and any other installment loans or lines of credits (including credit cards), along with the mortgage amount on the home you hope to purchase.

For instance, if your household’s monthly income is $7,000, the maximum DTI would be around $3,010. If your car payment is $200, your student loans are $600, and credit cards are typically $300, that would leave room for about $1,910 in housing-related expenses.

If your DTI is too high to buy the type of home you’re considering, consider contacting a financial professional who is well-versed in student loan programs. There may be a different repayment option available that will lower what you pay monthly on your student debt, freeing up more of your budget for a mortgage payment.

2. Credit scores aren’t hurt by having student loans, they are hurt by poor payment records.
Having a student loan doesn’t significantly lower your credit score, if it lowers it at all. Having a student loan and a history of missed payments, however, will definitely lower your score. This is important since the lower your score, the higher the interest rate a mortgage lender will charge, and the less affordable homeownership will be.

Before applying for a mortgage, it’s a good idea to request a copy of your credit report (or reports if you have a co-borrower). Verify the information is correct. If there’s a recent history of irregular or missed payments, change your ways immediately. Banks are more interested in your recent performance than in what you did when you were younger and less financially aware.

3. Repaying a student loan means you have less to save for a down payment, but there is still hope.
Many states and municipalities offer assistance for first-time homebuyers as does the Federal Housing Administration, a government agency.

To learn more about any programs you might qualify for that will make homeownership more affordable, contact your local lender.

As for options for minimizing your monthly student loan payments and other actions you can take to potentially improve your credit score before applying for a mortgage, contact an NFCC Certified Consumer Credit Counselor. Each is well-versed in the choices you have for keeping student debt from significantly delaying milestones in your life, like purchasing a first home.

Who is the NFCC?

Founded in 1951, the National Foundation for Credit Counseling® (NFCC®) is the nation's first and largest nonprofit dedicated to improving people's financial well-being.

NFCC members help millions of consumers like you through community-based offices located in all 50 states and Puerto Rico. Each NFCC member agency has earned our seal by adhering to high standards and ethical practices designed to help you achieve financial stability.

Funding for operations and services comes from an ever-changing combination of federal, state and local government grants, as well as donations from financial industry participants and private donors.

For more on the NFCC, visit www.NFCC.org

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The Sharpen Your Financial Focus program is an initiative of the National Foundation for Credit Counseling (NFCC) in partnership with a broad cross-section of supporters. Together, we are committed to increasing the financial well-being of Americans. This initiative is partially funded by Bank of America, Chase, Synchrony, Wells Fargo and other major financial institutions. We thank all funders and partners who make this program possible. For more information, visit www.SharpenToday.org.

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