How to Qualify for a Mortgage With Student Loan Debt

For most people, taking care of student loan debt is one of the biggest challenges to overcome before beginning their homebuying journey. In 2022, 43% of homebuyers reported student loan debt as an expense that delayed their ability to save for a home, according to the National Association of REALTORS®.

Student loan debt can heavily impact your debt-to-income ratio (DTI) and your credit score, two major financial factors that mortgage lenders review for a mortgage loan. Here’s how to overcome these two challenges:

Lower your debt-to-income ratio 

This year, mortgage lenders denied the applications of 32% of homebuyers due to their debt-to-income ratio. Mortgage lenders look at your DTI to determine your ability to afford a mortgage loan. Specifically, they look at the front-end and back-end DTI. The front-end DTI ratio is your potential monthly mortgage payment, including property taxes and homeowners insurance, compared to your monthly gross income. The back-end DTI ratio is your minimum monthly debt payments, which includes student loans, credit cards, auto loan and personal loans, compared to your income. It is important to note that mortgage lenders usually look for a back-end DTI of 36% or lower. If you have high student loan debt, it could increase your DTI ratio exponentially, putting you at risk of being denied a mortgage.

Improve your credit score

Your credit score conveys to lenders your ability to manage debt and pay back the money you have borrowed in the past. The higher your credit score is, the higher your chances are of being approved for a mortgage. Your student loan debt amount, monthly payment, and payment history contribute to your credit score. If you are making you full payment on time each month, your credit score should increase. However, if you have missed payments or failed to pay on time, your credit score could decrease, raising concerns for a lender in the mortgage approval process.

If you have a high DTI ratio and a poor credit score due to your student loan debt, buying your dream home can be difficult, but not impossible. Mortgage loan guidelines evaluate student debt differently, so your DTI will be different for each loan program. Here’s an overview of the three most popular loan programs used by homebuyers with student loan debt to buy a home.

Here are loan programs often used by homebuyers with student loan debt:

FHA home loans 

The FHA home loan is popular with first-time home buyers as the eligibility requirements are more lenient than other mortgage programs.  The floor loan limit in 2023 for FHA home loans is $472,030.  In high-cost areas, the current FHA loan limit ceiling is $1,089,300. Click here to see the 2023 FHA loan limits for your county.

These are the common criteria to meet to qualify for an FHA loan, but check with your lender for their specific eligibility requirements:

  • A DTI of 43% or less
  • A minimum 3.5% down payment with a credit score of 580 or higher
  • Mortgage insurance premium is also paid monthly for the duration of the loan

In June 2021, the FHA changed its guidelines for calculating student loan debt. FHA mortgages now take the homebuyer’s monthly student loan payment amount into the DTI calculation. For example, if you have a $0 monthly payment or your student loans are in forbearance/default, the FHA uses 0.5% of the total student debt balance. A $50,000 student loan debt is now calculated as $250 towards DTI, freeing up an extra $250 per month in affordability for a home purchase.

Conventional conforming home loans

Fannie Mae and Freddie Mac conventional conforming loan guidelines are slightly stricter than FHA loan guidelines, but if you’ve got a higher credit score, they’re a good option to consider. In 2023 the conforming loan limits range anywhere from $726,200 for much of the U.S. to $1,089,300 for high cost some areas.  Click here to view the limits in your county. 

These are the common qualifying criteria for a home loan with each company, but check with your lender for their specific eligibility requirements:

Fannie Mae loans

  • A DTI up to 50%
  • A minimum credit score of 620
  • A down payment of at least 3% of your home’s purchase price
  • Private Mortgage Insurance (PMI) is required when the down payment is less than 20% of your home’s purchase price. You can apply to have the PMI removed once you have accrued at least 20% equity.

Freddie Mac loans

  • A DTI up to 45%
  • A minimum credit score of 620
  • Private Mortgage Insurance (PMI) is required when the down payment is less than 20% of your home’s purchase price. You can apply to have the PMI removed once you have accrued at least 20% equity.

To calculate student loan debt, Freddie Mac uses 0.5% of the outstanding student loan balance to calculate a monthly payment amount for a mortgage application. For student loans in deferment, Fannie Mae calculates $0 towards DTI, and Freddie Mac calculates 0.5% of the principal balance.

VA home loans 

The VA loan program is available to veterans, active-duty, National Guard, reserves, and surviving spouses.

  • No down payment is required
  • No mortgage insurance is required
  • The VA has no minimum credit score requirement, but most lenders want to see a minimum credit score of at least 620 but some may accept a lower score
  • While you won’t pay for monthly private mortgage insurance, VA loans require a Guarantee Fee* (Funding Fee) which may be financed, so you should have minimal out-of-pocket closing expenses. Purple Heart recipients are not required to pay the VA Funding Fee.

Paying off student loan debt while also saving for your home down payment can be challenging. Creating a goal for each objective and a budget in your FinLocker will make it easier to manage your income, track your payments and set aside money for each goal.

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