Student debt and mortgages: How to buy a house with student loans

It’s hard enough to find the money to buy a house these days, even with good credit scores and two decades of savings in the bank. Throw student loans into the mix, and the whole thing can seem downright impossible. If you have student debt, don’t panic – it’s possible to buy a home with student loans and it doesn’t have to be nearly as difficult as you might think.

Student debt and mortgages: How to buy a house with student loans

The Mortgage Process

If you have good credit, a steady income, and can show that you can repay the loan, you may qualify for the best mortgage rates available. The first step is to find out if your lender offers a conventional loan or an FHA (government) mortgage. If it's not either of those two types of loans, then it's likely that there will be restrictions on how much debt you can have before qualifying. Once you know which type of loan you're going to get, take time to do some research into what kinds of homes are available in your price range. You'll also want to figure out what your budget is and whether or not you'll need any other loans besides this one in order to afford the monthly payments on a home purchase.

Tips for Qualifying

Having the right loan is key to buying your first home. A conventional mortgage, such as those offered by Fannie Mae or Freddie Mac, maybe the best option for you. However, if your credit score is below 640 you may need to look at other options like an FHA or VA loan. If this is the case, then it's time to work on improving your credit score. The lender will also want to know what your employment status is and what type of employment-based mortgage program they can qualify you for. 

If you're interested in reducing your DTI (Debt-to-Income Ratio), consider waiting until after graduation before applying for a mortgage. Or better yet, consider renting until you're ready to make that big purchase!

Applying for a Mortgage

Figure out your budget before you apply for a mortgage. The higher your debt-to-income ratio, the less likely you'll be approved for a mortgage. To lower your DTI, try refinancing your student loans, paying off high-interest credit cards, or asking family members to co-sign on the loan. Once you're in a position to qualify for a mortgage, choose the type of loan that works best for your situation. Options include standard conventional loans, HomeReady or Home Possible Loans from Fannie Mae and Freddie Mac, VA Loans (for veterans), and Employment-based Mortgages (through work). Check with your lender about what types of debts are allowed as part of your DTI when applying for a home loan so that you can plan ahead.

Mortgage Options

The mortgage options available to those who have student loan debt are not limited. The most common mortgage type is the conventional mortgage, but it may be too expensive for those who have excessive debt or high-interest rates. You can get a home-ready loan or a Home Possible Loan if you are unemployed but have steady income and credit scores. A VA loan or FHA loan may also be possible. They will require a down payment though, which means that your DTI will be higher. An employment-based mortgage can also be an option if you have good credit and good job prospects. If you do need help with reducing your DTI through budgeting or living within your means then remember that there are many different resources available to you from family members, friends, churches, nonprofits and government agencies just waiting to help out.

Mortgage Insurance

The best way to reduce the number of monthly payments is by buying a home that you can afford. Not only will you have your own place, but you'll also be able to live in it for years without having any additional payments. If you need help figuring out what your budget should be, there are plenty of calculators online that can help you work out how much money you need on top of rent or mortgage payments. Reducing your DTI (debt-to-income) ratio means paying off more of your loan while keeping up with other expenses. With a lower DTI, lenders will view you as less risky which means they may approve you for a loan more easily than someone who has an average DTI. In order to reduce your DTI, start by paying off high-interest credit cards first followed by auto loans and then finally move onto student loan debt.