Getting a Mortgage With Student Loan Debt is Getting Harder

Student loan debt is becoming a big deal. It’s the new ‘subprime,’ in terms of financial buzzwords with negative connotation. But are we making mountains out of molehills? Or is student loan debt really the economic burden some claim?

The numbers don’t inspire confidence:

  • Student loan debt in the U.S. has doubled since 2007.
  • The current level of student debt is estimated to be $1.1 trillion, nationally. That makes it the second largest form of household indebtedness, after mortgage loans. (Source: Federal Reserve Bank of New York)
  • Student debt was the only major type of debt to increase in prevalence among young households during the recession. (Source: Pew Research)

Kevin Carey, the director of the Education Policy Program at the New America Foundation, likens it to an unintended social experiment: “Let’s send a whole class of people out into their professional lives with a negative net worth,” he told the New York Times. “Not starting at zero, but starting at a minus that is often measured in the tens of thousands of dollars.”

How student loan debt will create a nation of renters

Can I Get a Mortgage With Student Loan Debt?

Reader question: “I graduated from college a few years ago, and I still have quite a bit of debt from my student loans. It was about $30,000 the last time I checked. I want to buy a house sometime next year. How will this affect me? Can I get a mortgage loan with this much student loan debt? I have a steady job with pretty good income, especially for someone my age.”

You are certainly not alone, as the statistics above indicate. The rising cost of college tuition, combined with financial troubles at the “Bank of Mom and Dad,” have put a lot of graduates in the same situation.

Let’s start with some short answers:

  • Question #1 — How will your student loan debt affect you when applying for a mortgage loan? It will affect your debt-to-income (DTI) ratio, which is a comparison between the amount of money you earn and the amount you pay in recurring debts. If you have too much debt in relation to your income, you will not be able to qualify for a mortgage. Your student loan debt also affects your credit score, for better or worse. We will talk more about these factors below.
  • Question #2 — Can you get a mortgage with student loan debt? Possibly. People do it all the time. It will largely depend on (A) your payment history and (B) the DTI ratio mentioned above. Student loan debt can actually help or hurt your chances of getting a mortgage loan, depending on how you’ve managed it over the years.

How Student Loan Debt Affects Your DTI Ratio

When you apply for a mortgage loan, the lender will examine a wide variety of financial factors. They do this to determine how much risk you bring to the table, as a borrower. They also want to see if you are capable of taking on additional debt in the form of a mortgage loan.

One of the things they’ll look at is your debt-to-income ratio, or DTI. As mentioned earlier, this is a numerical comparison between your monthly income and your monthly recurring debts.

If your total recurring debts (including your mortgage payments) will exceed 45% of your gross monthly income, you may have trouble qualifying for a loan. The less you owe in relation to your income, the easier it will be to get approved for a loan.

Obviously, your student loan debt plays into this equation. It directly contributes to your DTI ratio, and therefore affects your ability to get a mortgage.

Having A Good Income Works to Your Advantage

You said you have a good income for someone your age. This should work to your advantage when you apply for a loan. It will offset your student loan debt, to some degree. A higher income will result in a lower DTI ratio, when the debt level remains constant.

Here are two scenarios that show how your income can offset your debt, when it comes to mortgage approval.

  • (A) $30,000 student loan balance with an interest rate of 6.8% = $350 per month
  • (B) Other debts, such as credit cards and car loan = $250 per month
  • (C) Estimated monthly payment on mortgage loan = $2,000
  • (D) Total monthly recurring debts including the mortgage loan = $2,600 (A + B + C)

Scenario 1: gross monthly income equals $8,000
Total DTI equals 32.5% (2,600 ÷ 1,000 = 0.325, or 32.5%) Pretty good

Scenario 2: gross monthly income equals $5,000
Total DTI equals 52% (2,600 ÷ 5,000 = 0.52, or 52%) Not so good

These are the calculations mortgage lenders use to determine whether or not a borrower is qualified for a loan. In the first scenario, the total DTI ratio was 32.5%. This is considered acceptable by most mortgage lenders. In the second scenario, the borrower had a lower income level with the same amount of debt. So the DTI ratio shot up to 52%. This could be a deal breaker for some lenders.

Is too much debt the new mortgage killer?

Student loan debt can also affect your credit score, and credit scores are crucial when it comes to getting a mortgage loan. Your payment history on the various debts you owe accounts for 35% of your overall score — more than any other single factor. Have you paid all of your bills on time in the past? If so, you probably have a relatively high credit score. On the other hand, if you’ve missed payments or even defaulted on your financial obligations, you will have a lower score. This will hurt your chances of getting approved for a mortgage.

So you can see that student loan debt affects you in several ways when applying for a home loan. It affects your debt ratios as well as your credit score. These are two of the most important qualification criteria for borrowers.

To revisit your original question: Can I get a mortgage with student loan debt? If your total DTI ratio falls within the lender’s acceptable limits, and you’ve maintained a good credit score by making your payments on time, you stand a good chance of getting approved. But that’s a lot of ifs.

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