You’ve graduated from college, found a job, and are ready to settle down in a home of your own. But you wonder to yourself, can you afford to buy a house with your student debt weighing on your shoulders? It’s a common assumption that people with student debt can’t qualify for a mortgage loan, but the truth is that you don’t need to be 100% debt free to buy a home.
Getting a Mortgage
The first step in the mortgage process is to speak to a lender and get a preapproval. A preapproval letter is a document that states how much mortgage you have been approved to borrow. Getting preapproved is free, so it never hurts to see what your options are. Most preapprovals will also include the loan amount you qualify for and your estimated monthly payment. Getting preapproved before buying is essential, because it helps you shop for homes within your budget. When in the process of preapproval, underwriters (the financial experts who evaluate how much risk a lender will take on if they give you a loan) will look at your:
- Current Debt
- Credit Score
- Unusual activity in your bank account transactions
- Other assets you have
One of the top things lenders look at when considering you for a loan is your debt-to-income (DTI) ratio. This number shows how your monthly debt compares to your monthly income. Having a high DTI ratio would tell your lender that you may be at risk of falling behind on your payments.
How Lenders View Student Loans
When lenders look at your debt to determine your DTI ratio, they are looking at your monthly recurring expenses. With student loans, this means that they consider your monthly payments. If you are on an income-based repayment plan, the lender will use that payment amount (as long as it is above $0) in their calculations, so if you have $40,000 in student debt but the payments are $200 a month they will focus on the $200.
If you are curious what your DTI ratio is, add together all the regular, recurring payments you make (i.e. rent, renters insurance, student loan payments, etc.), then divide the number you get by your total pre-tax monthly income. If you are applying for the mortgage loan with someone else, include their income in your calculation as well. Multiply the number you get by 100 to get your DTI ratio as a percentage. Most lenders look for a DTI ratio of 50% or less. If your ratio is higher than that, you may need to take time to reduce your debt before buying a house. But always double check the numbers with an experienced lender. If you truly aren’t ready yet, your lender will study your ratios and calculate when you might be ready to purchase. They can also suggest ways to speed up the process by advising on which debts to pay off first. There is no charge for this service.
You don’t need to be debt free to buy a home. If your financial situation is stable and your calculated DTI ratio is under 50%, you may very well qualify for a mortgage loan. In some cases, there are loans available that allow for a maximum DTI of 57% (or more if you’ve served in the armed forces or National Guard). Your first step is to talk to a lender about your options. Over the years, we have worked with many lenders and have a collection of vetted lenders that we share with our buyers. We want you to get the best rate possible! Contact us if you have any questions or would like to see our list of preferred lenders.