Student loans helped you get through college, but now that you’re done, you have a lot of debt. Can these loans prevent you from getting a mortgage?
The good news is that student loans themselves don’t prevent you from getting a mortgage. They are like any other loan – you have to prove you can afford them along with the new mortgage. While student loans do have a few unique aspects about them, in general, you just need to prove you can afford a mortgage beyond a reasonable doubt.
What Lenders Look At
First, you should know that lenders look at a few things when you have student loans and apply for a mortgage.
First, they need to know that you can afford both payments. They’ll look at your debt ratio. First, they calculate your front-end ratio, which is the comparison of your gross monthly income to your new mortgage payment. Typically, it needs to be between 28% and 31% depending on the loan program.
Next, lenders look at your back-end or total debt ratio. This is a comparison of your total monthly debts, such as credit card payments and student loans, along with the new mortgage payment. This ratio typically needs to be no more than 36% to 43% depending on the loan program.
In addition to your debt ratios, lenders look at your payment history. This is where your student loans really come into play. Lenders need to see that you make your payments on time. They’ll pay close attention to any housing history you have, including rent, but the payment history on all loans matter. If you have several late payments on your student loans, it could decrease your eligibility for a mortgage.
Increasing Your Chances of Approval With Student Loans
If you have student loans, don’t assume you won’t get a mortgage. The only way they could prevent you from getting approved is if you make your payments late or you don’t make enough money to cover the student loan payments and a new mortgage.
If you want to increase your chances of loan approval, use the following tips.
Increase Your Credit Score
Do what you can to maximize your credit score. This could include:
- Making your payments on time
- Keep your credit card balances down
- Keep old credit card accounts open even if you don’t use them
- Mix up your credit so that you don’t have all student loans or all credit card debt
Over time, your credit score will increase with these habits. Also, avoid applying for any new credit in the months leading up to your mortgage application. You want to show lenders that you have as little debt as possible beside the student loan debt.
Keep Your Debts Down
We discussed debt-to-income ratios above, but it’s worth bringing up again. Aside from your student loans, try keeping other debts to a minimum, especially credit card debt. Revolving debt decreases your chances of approval if it’s excessively high.
A part of your credit score is your credit utilization ratio. This is a comparison of your outstanding revolving debt to the total available balance. Once your credit utilization rate is higher than 30%, your credit score may drop. Keeping your credit card debt as low as possible can help.
Of course, if you can pay your student loan debt down or off completely it will help matters, but don’t spend all of your down payment money trying to get rid of it. Instead, find the right loan amount that fits within your debt ratios that allows you to comfortably own a home with student loan debt.
Make a Decent Down Payment
Down payments show lenders that you have a vested interest in your purchase. The more money you can put down on the home, the more likely it is that you’ll get approved for the loan. Lenders like ‘skin in the game.’ It shows that you are dedicated to the home purchase and will do what it takes to make your payments on time. The more money you have at stake (your own investment), the more likely you are to make your payments on time.
Stabilize Your Employment
The longer you are at the same employer, the higher your likelihood of loan approval. Having a lot of student loans makes you a risky borrower. Lenders may wonder if you’ll be able to keep up with your payments. If you have stable employment/income, though, it gives lenders peace of mind.
If, on the other hand, you job hopped a lot and are often without a job, it makes lenders uneasy. Even if you have a job now, if you’ve only had it for a short time, lenders may not feel secure in your ability to repay the mortgage over the long-term.
Having student loans doesn’t prevent you from getting a mortgage; it’s about the big picture. You need to show lenders that you are a good risk and that you can make your payments on time. Decreasing your debt and stabilizing your income are two of the best ways to ensure mortgage approval with student loans.