Can You Get Approved for a Mortgage if You Have Student Loan Debt?

The short answer is Yes. But read on for a few considerations, suggestions and a caveat or two to prepare your finances before you apply.

A large percentage of recent college graduates have student loan debt, often totaling tens of thousands of dollars. While having significant balances might make it harder to become a homeowner, you may still be able to qualify for a mortgage.

Factors That are Important to Lenders
A lender will look at your overall financial picture to decide whether to approve your mortgage application. Each company has its own requirements, but all lenders look at several key criteria to make decisions.

An applicant’s payment history is one of the most important factors. If you have consistently paid your student loans and other bills on time, that demonstrates that you manage your finances responsibly and may increase your chance of qualifying for a mortgage with a competitive interest rate.

Editor’s Note: If you are currently renting a home, the lender will also check your payment history with your landlord.

Mortgage lenders also consider an applicant’s debt-to-income ratio or the percentage of monthly income that goes toward paying down debts. Lenders don’t want borrowers to have a DTI ratio above a specific percentage. And yes, your student loans will count toward debt.

An applicant’s credit score is also important. A high score could help you get approved for a mortgage with a competitive interest rate.

Editor’s Note: While the rate should be high on your list of considerations, be sure to shop several different lenders. Your rate with any lender will almost certainly depend on your own personal finances, but actual qualification is another matter. Each lender’s overlays (guidelines imposed by the investor purchasing your loan) are different and you may qualify with one lender where you won’t with another.

Improve Your Finances
If your current student loan payments would make it difficult for you to qualify for a mortgage, you might be able to switch to an extended repayment plan or an income-driven repayment plan to reduce your monthly payments and DTI ratio. If you have multiple student loans, you might be able to consolidate them and reduce your monthly payment. Do not request a forbearance or deferment to lower your debt-to-income ratio. That could cause a lender to wonder if you’re in financial trouble, and could hurt your chance of qualifying for a mortgage.

Pay all your bills on time. Focus on reducing your DTI ratio and your credit utilization ratio, or the percentage of your available credit you are using. Once you pay off a credit card, you should keep the account open since the length of your credit history affects your credit score. Avoid applying for new credit cards because hard credit inquiries could lower your score.

Editor’s Note: Never assume your lender can’t or won’t find out about missed payments. Lenders will require access to everything financial and late payments are glaring! And… this is a huge caution… never, ever during your mortgage process, buy a new car, a house full or furniture, or anything else that might be considered a major purchase. Your debt to income ratio could be affected to the point of loan denial.

Look for Other Sources of Help
If you can’t qualify for a mortgage on your own, consider buying together with someone close to you who might also be interested in buying a home. You could have a better chance of qualifying with a co-borrower since the lender would consider both your incomes and savings. However, both buyer’s debt will also be considered.

Another option is to ask someone to cosign a mortgage. That person’s income could help you qualify, but the cosigner would not have an ownership stake in the house.

Large student loan payments can make it difficult to save for a down payment. You may qualify for assistance through a program offered by the federal government or by your state government. You may also be eligible for a mortgage for first-time homebuyers with a low down payment or none at all.

Editor’s Note: There are still grants available to help you with your down payment in Maricopa and Pinal counties. Give us a call for further details, 602-999-0952