How Student Loan Debt Can Affect Buying a HouseAugust 12, 2022
It’s no secret that student loan debt is a major issue. As of 2022, there are more than 44 million people with outstanding student loans. The average student loan balance is $39,487, so it’s no wonder that people are struggling with their debt.
If you’re one of the millions with education debt, you know how burdensome they can be. But do student loans affect buying a house? The answer is yes.
In a study, researchers found that the decline in homeownership among young adults — individuals between 24 to 32 — was partially due to increased student loan debt. There are multiple reasons why student loans can affect homeownership, including:
- Student loan debt can damage your credit.
- Your debt-to-income ratio may be too high.
- You may struggle to come up with a down payment.
Let’s take a look at each of these in more detail.
How Do Student Loans Affect Buying a House?
If you dream of becoming a homeowner, you may wonder, “does student debt affect getting a mortgage?” While having student loan debt doesn’t make it impossible to buy a home, it can be more difficult for the following reasons:
Student Loans and Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is one of the key factors lenders look at when you’re applying for a mortgage. DTI is a calculation that measures how much of your monthly income goes towards debt payments. The higher your DTI, the less likely you are to get approved for a loan.
For example, let’s say your monthly income is $4,000. Your monthly student loan payment is $400, your car payment is $350, and you pay $250 per month toward your credit cards, giving you a total of $1,000 in monthly debt payments. Divide that number by your monthly income — $4,000 — to get your DTI. In this case, your DTI is 25%.
In general, mortgage lenders look for a DTI of 43% or lower. Even Federal Housing Administration (FHA) loans, which have less-stringent requirements, require a fairly low DTI. If you have a substantial amount of student loan debt, your monthly payments may cause you to have a much higher DTI, making it difficult to qualify for a home loan.
To improve your chances of getting a loan, look for ways to lower your debt-to-income ratio, such as paying off debt or increasing your income.
Your credit score is another important factor that mortgage lenders will look at when you’re applying for a loan. A good credit score shows lenders that you’re a responsible borrower and that you have a good history of making on-time payments.
If you have student loan debt, there’s a chance it could impact your credit score. The most common student loan-related issue is missed payments. If you miss a student loan payment, the delinquency is reported to the credit bureaus, and a single late payment can dramatically damage your credit.
Before applying for a mortgage, it’s a good idea to check your credit score and see where you stand. You can get a free credit report from AnnualCreditReport.com.
Student Loans and Saving for Down Payment
In addition to having a good credit score and DTI ratio, you also need to have money saved up for a down payment on a house. The usual recommendation is to save 20% of the desired home’s value, but there are some mortgage options that require less.
If you have student loan debt, it can be more difficult to come up with a down payment. That’s because you have less money available each month after making your loan payments, making it hard to decide between saving or paying off debt.
According to the Federal Reserve, the typical payment is $200 to $299 per month, which may take up a significant amount of your discretionary income. Over the course of five years, you’d pay between $12,000 and $17,940 toward your loans — depending on where you live, that’s enough to be a decent down payment on a house.
However, it’s still possible to buy a home even with student loans. There may be homebuyer assistance programs in your state that could help you with the down payment or closing costs, or you may qualify for an FHA loan that allows you to put down as little as 3.5%.
You can use the U.S. Department of Housing and Urban Development’s database to find homebuyer programs in your area.
Paying Off Student Loans Before Buying a Home
Many borrowers decide to pay off their student loans in full before buying a home. However, that may not be practical for everyone. With rising housing prices, waiting 10 to 25 years to buy a home may not be realistic or financially wise.
Even if you have outstanding loans, you can still become a homeowner by taking advantage of homebuyer assistance programs or using an FHA loan.
However, there are some cases where it may not make sense to buy a home when you have student loan debt. For example:
- If you’re barely making ends meet due to your student loan payments, you likely can’t afford to add a mortgage, maintenance costs, and property taxes to your budget.
- If your debt causes you significant financial stress, taking on a mortgage will only make you more anxious.
- If you may be eligible for loan forgiveness or will pay off your loans in the next six to 18 months, it may be better to wait.
In these scenarios, waiting to buy a home until after the loans are eliminated may be a better choice.
Refinance Student Loans to Lighten the Burden of Buying a Home
If you want to buy a home, student loan refinancing could help you accomplish your goal.
Refinancing is the process of taking out a new loan to pay off existing loans. The benefits of student loan refinancing can help prospective homebuyers in the following ways:
- Savings: When you refinance student loans, you may be able to get a lower interest rate. With a lower rate, you may have a smaller monthly payment, and you may pay off your loans faster, freeing up money for a down payment.
- Lower DTI: You may be able to choose a new student loan refinancing repayment term — lenders offer terms as long as 20 years — which will give you a lower monthly payment. You’ll pay more in interest over time, but you will have a lower DTI, making it easier to qualify for a mortgage.
- Simplifying Debt: When you refinance, all of your existing loans are combined into one. With just one loan to manage, it’s easier to stay on track with your payments, so you’re less likely to miss a payment and damage your credit.
Be aware that refinancing has some drawbacks if you have federal loans. If you refinance federal student loans, they are transferred to a private lender, and you’ll no longer be eligible for federal loan benefits. Carefully consider the pros and cons of refinancing before making a decision.
Refinance Your Student Loans With ELFI and Reach Your Goals
With ELFI, you can refinance federal and private student loans and have up to 20 years to repay your debt. ELFI offers both variable and fixed interest rates. It has a student loan refinance calculator you can use to see how refinancing would affect your monthly payment amount and total repayment cost.
You can use the Find My Rate tool to view your loan options without affecting your credit. And if you need more help with student loan refinancing, ELFI’s student loan advisors can provide personalized, one-on-one assistance.*