Do Student Loans Affect a Mortgage Loan Approval? The Answer Might Surprise You!
The idea of taking out a mortgage when you’re weighed down by student debt can feel unrealistic.
You may find yourself thinking, “How can we save for a down payment when we need to pay off our student loans? I doubt we would even be approved for a mortgage with how much we already owe.”
While I hear your concerns, you may be selling yourself short.
Not only is it possible to get approved for a mortgage when you have student debt (yes, even out-of-state, graduate loan-sized debt), but your home could actually help you pay them off!
It just takes a little planning on your part before jumping into the home-buying process. Let’s go over a few ways that can help you get a mortgage approval, even with a sizeable amount of student loan debt.
How Do Student Loans Affect a Mortgage?
Lenders are always more focused on your monthly payments rather than the total balances of your debts.
That’s because the monthly payments of all your debts are used to calculate your debt-to-income (DTI) ratio.
And DTI determines if you’ll be approved for a loan.
Income-Driven Repayment Plans
Even if you’re on an income-driven repayment (IDR) plan, you’ll still have a shot at loan approval.
Since lenders are more focused on your monthly payments in terms of debt-to-income ratio, there is less focus on the degree to which you’re paying off the total balance of your loans.
Pro Tip: You’ll need to provide your lender documentation to use the lower monthly payment on an income-driven repayment plan.
Every IDR plan is different, so you should discuss your plan with your lender to better understand how your situation impacts your mortgage loan approval.
COVID-19 Student Loan Deferment
Since student loans have been in deferment the last couple of years, credit reports typically report a $0 payment. But lenders still had to calculate a payment for the loan for the DTI.
Depending on the program, lenders have used either .5% or 1% of the total balance as the estimated monthly payment.
The only exception is applicants who were on an income-driven repayment plan before the COVID-19 deferment. If the applicant can provide documentation showing that the payment they’ll make once the deferment ends is less than the lender’s estimate of .5% or 1%, then the applicant can use the lesser estimated monthly payment to calculate their DTI.
Pro Tip: Just like other debt, late payments on student loans will weigh down your credit score, especially if those late payments have been recent.
Be sure to:
Give your loan company your most up-to-date information.
Mark your calendar to stay on top of when to make payments or set up auto-pay.
How to Lower Your Debt to Income Ratio Quickly
Even if buying a home is a future thought for a few years down the road, now is the time to start improving your credit score and lowering your DTI.
The best resource to help with this is a good lender who can give you a step-by-step plan to meet your goals. (If you need one in Colorado, shoot me an email. I’d love to save you time by giving you my shortlist.)
Here are a few ways you can lower your debt-to-income ratio quickly:
Don't close credit card accounts with zero balances because it’ll look good on your credit score. For example, if you have a Discover card you never use with a $5,000 credit limit, that's $5,000 of credit you're not utilizing. Bonus: if you’ve had the account for a long time, it improves your credit life, which improves your score.
Bring down the balances on your existing credit cards. A lower balance improves your DTI and it can positively affect your credit score.
Don't apply for a bunch of new credit cards less than a year before you apply for a mortgage. Each application for a new card makes a hard pull on your credit. Too many hard pulls in a short time can negatively impact your credit score.
If it's a year or more before you're applying for a mortgage and you need more available credit, opening an account or two may not negatively impact your credit score. As always, talk to your lender and review your credit score before making that decision.
Pro Tip: If opening a new line of credit is the right decision for you, it’s better to go through a bank, such as the Chase Freedom Visa card. A larger bank will have much more extensive lines of credit than, say, a department store card like JCPenney.
Conclusion
With careful planning and following the tips above, your student loans shouldn’t negatively impact your ability to qualify for a mortgage.
The key is having a great credit score and a low debt-to-income ratio, which you can do despite your loans.
And when you’re ready, I’d love to help you find your dream home. Just send me an email to get started.
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