Effect of Student Loan Debt on Home Buying Ability: What You Need to Know

Title: How Student Loan Debt Impacts Homeownership: What You Need to Know

Across the U.S., over 43 million people have federal student loan debt, which averages out to over $37,000 per borrower, according to the Federal Student Aid office. And when you factor in private student loan debt too, the average balance could be closer to $40,000, according to the Education Data Initiative.

Meanwhile, many recent college grads — many of whom have student loan debt — are also becoming homeowners.

Millennials now comprise the largest age group of homebuyers, according to the National Association of Realtors. And Gen Z, while only accounting for 3% of home buyers, is starting to emerge as a real estate cohort.

So, as more young Americans enter the real estate market, it’s important to gain a better grasp on how student loan debt affects your ability to buy a house, particularly in terms of qualifying for a mortgage.

In general, student loan debt can make it a little harder to get a mortgage.

“Applying for a mortgage loan while carrying an existing debt could potentially lessen your chances for approval. This is because anytime a borrower takes out a second loan they become at higher risk for default,” said Dan Richards, president of Flyhomes.

But the good news is that student loan debt generally isn’t treated differently than other debts, like car loans or credit card balances, when it comes to qualifying for a mortgage.

So even if you have, say, as much student loan debt as the mortgage you’re trying to obtain, that doesn’t automatically disqualify you. Instead, a big consideration is usually your overall monthly debt payments in comparison to your income.

“Student loan debt is treated similarly to other types of debt when applying for a mortgage. Lenders focus on your monthly payment amount rather than the total balance, as they are more concerned with your ability to make monthly mortgage payments alongside your existing debt payments, rather than imposing a strict limit on the amount of student debt you can have,” said Jeff Levinsohn, CEO at House Numbers.

Specifically, banks and mortgage lenders typically want to see your debt-to-income (DTI) ratio be below 43%, he said.

Keep in mind, however, that your DTI includes what your new mortgage payment would be, along with other housing costs like property taxes and insurance.

If your student loan debt pushes your DTI too high or at least higher than you’d like in terms of qualifying for a good mortgage rate, then there are ways to potentially improve your positioning.

One possible solution is to change your student loan payments so that you’re paying less per month and therefore can lower your DTI.

“The federal government currently offers four different income-driven repayment programs that you may want to look into if you have federal student loans,” said Melissa Cohn, regional VP and mortgage banker at William Raveis Mortgage.

In some cases, you can also adjust your DTI through either the debt or income levers. For instance, “another option would be to consolidate or refinance your student loans to try to get a lower payment than what is shown on your credit,” said Jeremy Schachter, mortgage loan officer and branch manager at Fairway Independent Mortgage Corporation.

Lastly, you might look into ways to reduce your overall student loan debt balance.

“I would also encourage everyone to research the various loan forgiveness programs at the federal and state level to see what they qualify for,” Richards said.

Doing so can make it easier to qualify for a mortgage while also reducing your overall debt levels, which can help take some pressure off as you add the responsibility of being a homeowner.