For some, buying a house is the American dream. But if you have student loans, you may feel like that dream is unattainable. In fact a survey by the National Association of Realtors found that 83% of non-homeowners said their student loans were delaying them from buying a house. High student loan payments may be holding you back from saving for a down payment or even from entertaining the idea of a mortgage. However, it is possible to buy a house with student loan debt. It just might take some extra work.
Just like any financial decision, you have to make the decision that’s best for you. If you are trying to decide whether you should buy a house while you have student loan debt, weigh these pros and cons to help with your decision.
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:
Lock in a Low Interest Rate
During an economic time when mortgage interest rates are low, like now in November 2020, it is great to be able to lock in a low mortgage interest rate if you qualify for a mortgage. If you wait until your loans are paid off, interest rates may rise during your waiting period.
Take Advantage of a Buyer’s Market
If you are able to take advantage of a buyer’s market, that’s a plus, even if you still have student loan debt. Buying a house when there is a lot of inventory gives you more choices and possibly allows you to buy a house for less than the median price.
Sometimes, Buying May Be Cheaper Than Renting
If you live in a city where rental rates are high, you may even save money by buying a house rather than renting. For example, in Jacksonville, Florida the median home price for a single-family residence is $215,000 and a possible mortgage payment could be $964 compared to the average monthly rent of $1,395. However, this does take into account a 20% down payment, which could be a large goal to achieve.
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.
Slows Down Student Loan Repayment
If you are saving for a down payment or purchase a house and then have to pay for maintenance and upkeep, you may be using extra funds that could have been put towards 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 9 payments during a consecutive 10 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 the 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 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.
The Bottom Line
If buying a house is a goal of yours, your student loans don’t have to prevent you from achieving that goal. But if you have large amounts of debt or a defaulted loan it may take some time and hard work on your finances to better improve your chances of qualifying for a mortgage. Either way, you will be improving your finances and closer to achieving your dream.
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