Qualifying for a Mortgage with Student Debt

Blog posted On June 30, 2023

The dream of homeownership may seem out of reach to those holding on to student debt. But, with careful planning and a clear understanding of the factors involved, it is possible to secure a mortgage while managing student loan obligations. There are some key strategies and tips you’ll want to keep in mind to help you qualify for a mortgage with student debt.

Access your financial position

No matter your financial status, it’s crucial to start your home buying journey by taking a hard look at your financial health. You’ll want to understand your starting point so you can better plan the next steps.

Talk to a loan officer to get a handle on your:

  • Credit Score: Even with less-than-perfect credit and student loan debt, you may be eligible for programs to get you the financing you need.
  • Credit Report: Review your credit report and ensure that it’s error-free. If there are errors, having one or two removed can significantly improve your score.
  • Debt-to-Income (DTI) ratio: Like credit scores, there are loan options for different DTIs. You may be able to buy a home quicker than you’d think with a DTI that includes your student debt.

Pay down debt strategically

While it may be tempting to aggressively pay off your student loans before applying for a mortgage, it's important to strike a balance. Lenders consider your monthly debt payments when determining your mortgage eligibility, so focusing solely on paying down student debt might leave you with limited funds for a down payment or closing costs.

Consider a strategic approach by making regular payments on your student loans while saving for a down payment simultaneously. This demonstrates responsible financial management to lenders and improves your chances of securing a mortgage.

Explore loan forgiveness programs

If you have federal student loans, investigate loan forgiveness programs or income-driven repayment plans. These programs may help lower your monthly student loan payments, consequently improving your DTI ratio and increasing your chances of qualifying for a mortgage. However, it's essential to understand the long-term implications and eligibility requirements of these programs before enrolling.

Work on increasing your income

Supplementing your current income can alleviate the burden of student debt and improve your eligibility for a mortgage. Consider taking on a side job, freelancing, or exploring opportunities for career advancement that could lead to higher income in the future. Extra income can be a great goal in and of itself, but a higher income can also improve your chances of qualifying for a mortgage.

Save for a down payment

While it's possible to secure a mortgage with a low down payment, having a substantial down payment can provide several advantages. A larger down payment reduces the amount you need to borrow, lowers your monthly mortgage payments, and may even help you qualify for better interest rates. Establish a savings plan and set aside funds specifically for your down payment to enhance your chances of obtaining a mortgage.

Understand your mortgage loan options

For individuals with significant student debt, several mortgage programs are available that can help ease the qualification process. One is the Federal Housing Administration (FHA) Loan program. FHA Loans are government-backed loans that have more lenient credit requirements and lower down payment options compared to conventional loans. They also consider higher debt-to-income ratios, making them more accessible to borrowers with student debt.

The Fannie Mae HomeReady® loan program is also a great option, as it’s designed to support lower-income borrowers by offering a low down payment option coupled with the added benefit of cancellable mortgage insurance. With the HomeReadyÒ loan, borrowers can enjoy the flexibility and peace of mind that comes with the possibility of canceling their mortgage insurance, making it a favorable choice for those seeking affordable homeownership solutions.

In addition to its low down payment options, a Freddie Mac loan program, Home Possible®, allows coborrowers who do not live in the home to be included in the financing of a one-unit residence. This means that buyers with student debt can add a parent of other co-borrowers to their mortgage.

Additionally, the Department of Veterans Affairs (VA) Loan program is available for eligible Veterans, active-duty service members, and surviving spouses. VA Loans often have more relaxed credit and debt requirements, making them a viable option for individuals with student debt.

When it comes to buying a home, student debt isn’t the roadblock that it may seem to be. Working towards the long-term goal of homeownership with a loan officer means mapping out a solid financial strategy and getting a comprehensive understanding of your options. When you’re ready, we’ll be here to help!

Sources: Bankrate