For millions of people, owning a home is a quintessential part of the American dream. But with so many young adults having outstanding student loans, the dream of homeownership can seem like an unrealistic fantasy. According to a 2021 survey released by the National Association of Realtors, 29% of student loan borrowers said their debt delayed them from buying a home.
However, it is possible to buy a home even if you have outstanding student loan debt; it just might take a little extra work.
As with any financial decision, deciding whether to buy a home when you have student loan debt is a personal choice. If you aren’t sure whether it’s a good idea, carefully consider the pros and cons and your finances to make an informed decision.
Can Student Loans Affect Buying a House?
Having student loans doesn’t prohibit you from buying a home, but it can make it more difficult for the following reasons:
- You may struggle to make ends meet: Any kind of debt can make it difficult to pay your bills. And if you have a high-interest rate, you might not have a lot of wiggle room in your budget, so it may be challenging to afford the payments on a mortgage.
- You may not be able to save a down payment: With most mortgages, you need to have a down payment of 3% to 20% of the home’s price. But if you have high student loan payments, finding the money to save for a down payment can be challenging.
- Your debt-to-income ratio may be too high: When you apply for a mortgage, the lender will look at your debt-to-income ratio, which is the amount of money you owe in relation to your income. If this number is too high — and it may be if you have a large student loan balance — you may not be eligible for a mortgage.
Buying a house with student loan debt is not impossible, but it can be more complicated than it would be if you were debt-free. Depending on your circumstances, it may still make sense, but it’s important to be realistic about the potential challenges.
Pros of Buying a House Before Paying Off Student Debt
Here are a few potential upsides to buying a house before fully paying down your student loans:
Secure a Lower Rate
For a long time, mortgage rates were at historic lows. Unfortunately, that’s not the case anymore. As of the end of 2022, the average rate for a 30-year fixed-rate mortgage was 6.42%.
While that’s higher than the rates of a few years ago, it’s lower than it has been recently. In November, rates reached a high of 7.08%. And it’s likely significantly lower than the rates we’ll see in 2023.
Realtor.com predicted that mortgage rates will average 7.4% in 2023, so locking in a lower rate now could help you save money.
Take Advantage of a Buyer’s Market
With rising interest rates, the housing market has cooled from the peaks of 2021 and 2022. According to Zillow, housing prices have dropped recently, there is increased inventory, and homes are on the market longer. For homebuyers, that can mean it’s a good time to buy.
Buying May Be Cheaper Than Renting
If you live in a city where rental rates are high, you may save money by buying a home. Your mortgage payments may be lower than you’d have to pay in rent. And even accounting for home maintenance and taxes, you may be able to build equity and better your finances by becoming a homeowner.
The New York Times has a handy rent vs. buy calculator you can use to determine whether buying or renting makes more financial sense.
More Room For Your Family
One of the advantages of buying a house while paying off student loan debt is that you can get more space for yourself and your family. Whether you plan on having children, work remotely and want a dedicated office space, or simply want a yard for your dog, buying a home can give you more room than you may get renting.
Increase Your Assets
If you make a wise financial purchase, it’s possible that your home could increase in value, especially if you improve upon it while living there. If you wait until your student debt is paid off, you may miss out on a wealth-building asset.
Cons of Buying a House Before Paying Off Student Debt
Just like there are pros to buying a house while you have student loan debt, there are also some cons to consider.
It Could Deplete Your Savings or Emergency Fund
Buying a home requires a substantial upfront investment. You’ll need to cover the down payment and closing costs, and the house may need repairs. Home repairs are never cheap, and you may be surprised by just how much they can cost. For example:
- Roof replacement: If you find your roof is damaged or simply old, the cost can be quite high. The average cost of replacing a roof was $8,997.
- Updated hot water heater: If your hot water stops working, a new one averages $1,257 for the unit and installation.
- Drafty windows: When you move in, you may find that your windows are old and let cold air enter your home. The cost of updating your windows can be jaw-dropping; on average, it costs $850 per window. Considering that homes usually have between six and ten windows, you should expect to spend anywhere from $5,100 to $8,500 to replace your windows.
Those expenses can wipe out your savings and quickly deplete your emergency fund. And if anything else goes wrong — a flat tire, a medical bill, a veterinary emergency — you could be left scrambling to cover the cost or end up taking on more debt.
Slows Down Student Loan Repayment
If you are saving for a down payment or purchasing a house and then have to pay for maintenance and upkeep, you may be using extra funds that could have been put toward your student debt. This could slow down your student loan repayment process and cause you to pay more in interest over time.
Qualifying May Be Difficult
If you have a large amount of student loan debt, your debt-to-income ratio may be too high to qualify for a mortgage or may qualify you for a less-than-stellar interest rate or mortgage type. This could cause you to end up paying even more in interest for the mortgage.
Your debt-to-income ratio is calculated by adding up all your minimum debt payments, including the future mortgage payment, and dividing it by your monthly gross income, and multiplying by 100 to get a percentage. In order to lower your debt-to-income (DTI) ratio, you could think about refinancing your student loans in order to lower your monthly payment.
Loan in Default
If you have any student loans in default, you will need to rehabilitate the loan before you will be able to obtain a mortgage so that the default will not remain on your credit history. Having a federal student loan in default will prevent you from qualifying for an FHA mortgage, which is typically easier to qualify for since it requires a lower down payment and has easier credit guidelines to meet.
Rehabilitating a loan will require additional time before you can even qualify for a mortgage. In order to rehabilitate a loan, you need to make nine payments for ten consecutive months.
Loan in Deferment
If you are attempting to purchase a home with student loans in deferment, you may find it difficult to qualify for a mortgage, especially a FHA mortgage. For a FHA mortgage, deferred loans are still included in your debt-to-income ratio. The FHA will calculate your DTI by taking 1% of the deferred student loan balance, which may be higher than what your actual payment may end up being. This can make it difficult to qualify for a mortgage based on a high DTI ratio.
When Might You Consider Buying a House While You Still Have Student Debt?
After weighing the pros and cons, if you are still unsure whether purchasing a home while you have student loan debt is a good decision for you, check out these scenarios where buying a home may be a better fit:
You have a three-month emergency fund, contribute to a retirement account, pay the minimum on your student loans, and have no additional debt.
- You refinance your student loans to lower your monthly payment and thereby lower your DTI ratio when applying for a mortgage. You qualify for an FHA mortgage and take advantage of a buyer’s market to get the home that meets your needs now.
- You are able to save a 20% down payment and buy a home where your mortgage payment is less than your rent payment.
How to Buy a House and Pay Off Student Loans
If you have outstanding new loans and are thinking about buying a house, there are strategies you can use to make it happen:
- Refinance your loans: Student loan refinancing can allow you to lower your monthly payments. With a lower payment, you can have a better DTI and free up money to save for a home.
- Enroll in an income-driven repayment plan: If you have federal loans, you can enroll in an IDR plan and get a lower monthly payment based on your discretionary income. A lower payment can make it easier to afford your mortgage payments.
- Explore first-time homebuyer programs: Many states have programs for first-time homebuyers. Depending on where you live, you may qualify for mortgages with low down payment requirements, assistance with closing costs, or even help to repay your student loans. Check with the U.S. Department of Housing and Urban Development to see what local programs are available.
- Pay down debt: Pay off as much of your student loan or credit card debt as possible before applying for a mortgage. This can help you qualify and may even increase your chances of getting a lower interest rate on the loan.
- Increase your income: Boosting your income by asking for a raise or starting a side hustle can improve your DTI and help you qualify for a mortgage. Plus, you can save your additional earnings to build up a down payment faster.
Refinance Your Student Loans with ELFI
Should you pay off student loans before buying a house? It’s a common question, but the answer isn’t always straightforward. Whether it makes sense to buy a home when you have outstanding student loan debt is dependent on your balance, monthly payments, your savings, and your financial goals.
If you want to become a homeowner, refinancing your loans can be a good idea so that you can lower your payments and save money for a house. With ELFI, you can check your refinancing options without affecting your credit score.
