Qualifying for a Mortgage with Student Loans

Student loans can pose problems for many first-time home buyers trying to qualify for a home loan. This isn’t a news flash for most of us with student loan debt, but it also doesn’t have to mean the end of the road for the dream of homeownership.

One very important note for borrowers with student loans is there are actually a few different ways student loan debt can be calculated.

IBR/Monthly Payment Amount

Typically the most beneficial way to calculate student debt for qualifying is to use the borrowers' IBR (Income-Based Repayment) payment amount.

An example of this: borrower owes $75,000 in student loan debt, with an IBR monthly payment of $250 per month. The lender would use the $250 monthly payment in the borrowers' DTI (debt-to-income) ratio.

Percentage of Overall Amount Owed

Another way that student debt is calculated for mortgage qualifying is by a percentage of the overall debt.

An example of this: borrower owes $75,000 in student loan debt, with an IBR monthly payment of $250 per month. Based on qualifying guidelines, the lender would use 0.5% of the total debt, which is a $375 monthly payment in the borrowers' DTI ratio.

*Please note that the use of the IBR Payment or Percentage of Overall Debt for qualifying will vary depending on the lender you use and the loan product you are qualifying for.

Tips on Lowering Student Debt for Qualifying

Obviously, the less student debt you have the easier it will be to qualify for a mortgage. While student debt is not as limiting as many borrowers think, there are some ways to reduce your overall student debt if it is necessary to qualify. Here are a few tips worth considering, but please remember that our team offers FREE personalized consultations to build your homebuying game plan. This includes an evaluation of your student debt and how to put yourself in the best position for qualifying.

1. Consider consolidating your loans and use the savings to save for a down payment. There are programs available that can consolidate student loans and credit cards that help lower the overall monthly payments.

2. Pay your bills on time. This is the best way to keep your credit rating high, which helps you get the best rates (and thus the lowest payments) on other loans, such as for a car – or a mortgage.

3. Keep credit card debt to a minimum. Having one or two major credit cards is OK if you pay the balances off every month. If you have to carry a balance, try to move those balances to your lowest rate cards.

4. Don’t make big purchases or take out more loans if you’re getting ready to buy. This can directly affect your credit score and dash your hopes of buying a home. Remember that lenders do a recheck of your credit just before closing so it’s imperative that there are no new credit lines or loans that pop up at the last minute. Want a list of do’s and don’ts when you’re getting ready to buy? We have a great resource available.

5. Pay off whatever you can before you start your home search. This can help raise your score – and also help with your overall debt-to-income ratio (which measure the percentage of your income being paid out to monthly obligations).

6. Set – and keep – financial goals. Putting pen to paper and setting realistic, measurable goals can help you stay on track.

7. Keep on top of your credit report. Most consumers report having errors on their report – which can likely affect the overall score. If you’re going to start the process of buying a home, check your report and work to make it as accurate as possible. This is also a great time to see where there are areas for improvement to raise your score.

8. Take a holistic look at your budget. Make sure you can handle the monthly mortgage payment – regardless of what you “qualify” for. Does it fit within a comfortable space? Do you have easy ways to cut in other areas to accommodate a mortgage payment? Start making those cuts ahead of time to prepare your household for the new budget. You can use our payment calculator to help find the monthly payment that works for you.

9. Put extra money towards your down payment fund. Income tax refunds, bonuses, gifts and overtime pay are “extra” and shouldn’t be pushed through your monthly budget. By putting those funds away, you’ll have more money to put down, or put towards closing costs.