Buying a home with student loans can be tricky, but worthwhile in the long run. Here's what lenders look at and how to improve your buying power.
Can you buy a house if you have student loan debt? Yes. Mortgage lenders look not at the type of debt you have, but how much you owe, along with your income, credit score, and other factors.
As long as you can afford your student loan payments and monthly mortgage payment, and meet the other criteria for your loan program, buying a home with student loans may well be within reach.
In this guide, we’ll tell you everything you need to know about buying a home with student loans, including where to find financial assistance and how to save up for a down payment.
How student loan debt affects homebuyers
Student loan debt has skyrocketed in the U.S., with total student loan debt currently at $1.58 trillion, according to the Federal Reserve Bank of New York. The average individual balance is at an all-time high of $38,792.
Given that, student loan payments can make it difficult for prospective homebuyers to save up for a down payment. Lenders must also account for how your student loan obligations will affect your ability to repay your mortgage – but this may be less of a hurdle than you think.
Qualifying for a mortgage with student loans
“One of the biggest misunderstandings that I hear with buyers is that they feel that they cannot qualify due to the volume of debt they have,” says Brian Coutu, a mortgage advisor with Fairway Independent Mortgage Corporation (which owns Home.com). “But as a lender, we look at the minimum monthly payment — not the total balances. With this being said, it can be much easier for a buyer with student loan debt to qualify than one might think.”
Exactly how your student loan debt is calculated depends on the type of loan you’re using to buy a home and your current student loan repayment status.
Here’s a look at some common scenarios of buying a home with student loans:
Your loans are in deferment or forbearance
This is common for student loan borrowers whose accounts were put into automatic forbearance by the federal government’s COVID-19 relief program.
If your loans are in deferment or forbearance, and your credit report does not indicate a monthly payment amount, your lender will calculate your monthly debt-to-income ratio (DTI)* based on a percentage of your total balance. The percentage they use depends on the type of mortgage loan you plan to use.
Fannie Mae conventional loans require that lenders use 1% of the borrower’s outstanding student loan balance as their monthly payment. That means that if you owe $100,000, your lender would calculate $1,000 into your monthly DTI.
For a Freddie Mac conventional loan, your lender would use 0.5% of your outstanding balance. On a $100,000 balance, that would be $500 a month.
The Federal Housing Administration (FHA) announced this year that lenders could use 0.5% of a borrower’s outstanding student loan balance when calculating DTI for an FHA loan. Previously, it had to use 1% of the balance.
You’re on an income-based repayment plan
If you are on an income-based repayment (IBR) plan, your lender will use the monthly payment listed on your account or credit history. If your monthly payment on the IBR plan is $150, that is what will count toward your DTI, regardless of your outstanding student loan balance.
The FHA also changed its rules in 2021 to allow the actual IBR payment amount to be used on an FHA loan application. Prior to 2021, lenders had to use 1% of the loan balance regardless of what the borrower’s IBR payment was.
Your IBR payment is $0
Fannie Mae allows lenders to use a $0 monthly payment amount if that is what is stated on your IBR agreement and credit report. If your loan is in forbearance and you do not have a monthly payment obligation right now, they will have to use a percentage of your balance. But if you are on an IBR plan and your payment is $0, that is what lenders will use.
Freddie Mac requires lenders to use 0.5% of the outstanding balance if the monthly payment amount is $0. If the amount is greater than $0, lenders can use that number instead of the percentage.
If all of these guidelines are making your head swim, we get it. But you don’t have to make these calculations yourself. When you get preapproved* for your home loan, your lender will calculate your DTI and tell you which loan programs you’re eligible for and how much you can borrow.
Here’s the key takeaway for you right now: “Generally, the impact is much less than most first-time homebuyers assume, allowing you to still qualify and buy a home,” says Garett Seney, a mortgage advisor with Fairway in south Boston.
A tip on IBR plans
Michael Lux, founder of The Student Loan Sherpa, says the formulas for calculating student loan debt are “extremely unfriendly to borrowers.” After all, if your student loan balance total is $50,000 and you’re in a situation where the lender uses 1% as the DTI payment guideline, they are going to calculate $500 as the monthly payment.
But your actual repayment under a repayment plan could be much less. Lux advises all borrowers who plan on buying a house to make sure their loans are in an active repayment status and to sign up for the lowest monthly payment possible. Getting on a repayment plan may make the difference between getting approved or not, and it can also affect how much house you can afford. You can always pay more if you can afford more.
The basics of buying a home with student loans
If you’re worried about how you’ll afford your monthly mortgage payments while paying down your student loans, consider this. Homebuyers are often able to pay less in a monthly mortgage payment than they are in rent. So if you can afford a costly rent payment, chances are you can afford a home loan.
Additionally, there are a number of low and no down payment mortgage options that can make buying a home while paying off student loans attainable, even if you’re still paying down student debt.
Before exploring your homebuying options, it’s helpful to understand the different factors a mortgage lender will use to determine whether to approve you for a loan and how much you can afford. We break these down below, along with tips for how to increase your chances of qualifying.
Learn more: Rent vs Buy Calculator
One of the first things your lender will look at when you apply for a mortgage is your debt-to-income ratio (DTI).
DTI is the ratio of your total monthly debts divided by your gross monthly income (meaning income before taxes are taken out). These total debts include student loan debt, credit card debt, car loans, personal loans — whatever you must pay to creditors every month — plus mortgage payments.
Why do lenders focus on DTI? Because “they want to guarantee that you can afford your new mortgage payment while remaining current on all of your other commitments, including student loans,” says Hutch Ashoo, founder and CEO of Pillar Wealth Management.
They also have concerns that, “the more debt you have, the more likely you may fall behind on your payments,” adds Caleb Reed, founder of TheDollarBudget.
Your DTI affects whether you are approved for a loan, as well as how much a lender will allow you to borrow. They want to ensure that your monthly mortgage payments are manageable in the context of all your other debts.
The DTI you’ll need to qualify depends on the type of loan you plan to use to buy the home:
Loan type Maximum debt-to-income ratio (with some exceptions) Conventional loan45%FHA loan50%VA loan43%USDA loan43%
Lenders have some flexibility when it comes to the loan types listed above.
In some cases, lenders may be able to approve FHA borrowers whose DTIs are above 50%. The Department of Veterans Affairs (VA) and the Department of Agriculture (USDA) suggest a DTI of 43% as a guideline, but they give lenders the discretion to approve otherwise creditworthy borrowers with higher ratios. Likewise, Fannie Mae can accept a DTI up to 50% in some cases.
With all loan types, lenders will likely look for high credit scores, substantial savings, and/or high and consistent income to offset the risk of the high DTI.
If you’re concerned about your monthly debt obligations, here are a few ideas for lowering your DTI:
- Paying down debt as much as you can. Ashoo advises using “holiday bonuses or whatever other income you have. Even a minor reduction in credits will help you improve your debt percentages”
- Getting on an IBR plan to lower your payments
- Refinancing your student loan to lower your monthly payments
- Negotiating a longer payment period for your student loans to reduce monthly payment amounts
- Consolidating or refinancing your other recurring debt to reduce your monthly payments
- Take on side gigs or a part-time second job to increase your income and pay down debt faster
Lenders also will pull your credit score to determine whether you qualify for a loan and which types of loans you're eligible for.
Paying your bills on time is a major component of how credit scores are determined. If you’ve had challenges paying your student loans and fell behind on payments in the past, your credit score could be negatively affected.
However, having fallen behind in the past is not a deal-breaker. If you’ve been consistently paying your monthly student loan bills for some time, but a few late payments appear in your credit history, you may still qualify for a mortgage.
Your lender may ask for a letter of explanation describing why you were late on your payments and how your circumstances have changed since then.
Credit score requirements depend on your loan program:
Loan type Minimum credit score requirement Conventional loan620FHA loan580VA loan580USDA loan640
As with DTI, lenders have some flexibility on credit score requirements for VA and USDA loans. If a borrower is otherwise a strong candidate for a loan, they have the ability to approve them with lower credit scores. Not all lenders will do this, however, and some lenders set higher minimums for these types of loans.
If your student loan balance is high and you’re concerned about how it’s affecting your credit, try these tips for boosting your credit score:
- Pay down other debts to lower your credit utilization ratio, or how much of your credit you’re currently using
- Make all payments on time
- Request a copy of your credit reports from annualcreditreport.com each year and dispute any inaccuracies
- Avoid opening any new credit cards or taking out new loans in the months before you apply for your mortgage loan
A note about credit utilization
Like on-time bill payments, your utilization ratio is another major element in your credit score. While you may not be able to pay off your student loans quickly, keeping other debts to a minimum can help keep your utilization ratio low, which will positively impact your credit score.
Related reading: What Credit Scores Do Mortgage Lenders Use?
“Saving for a down payment is frustrating, because student loans often eat up a huge portion of your budget,” Lux says. “If you are able to save, the money sitting in the bank earns almost zero interest while the student debt continues to rack up interest charges.”
Nonetheless, those student loan payments don’t have to mean delaying homeownership due to the down payment.
There are a number of low down payment loan options available. Eligible borrowers can put 3% down on a conventional loan, and 3.5% down on an FHA loan. To qualify for a 3.5% down FHA loan, you must have a credit score of 580 or higher.
Veterans, active-duty servicemembers, and some surviving spouses may be able to buy a home with a 0% down VA loan if they have full entitlement benefit available and meet all of the other loan criteria.
And low- to moderate-income homebuyers in rural and some suburban areas may be able to purchase a home with a 0% down USDA loan.
Learn more: Top 12 Low and No Down Payment Mortgages
Loan type Minimum down payment requirement Conventional loan3%FHA loan3.5%VA loan0%USDA loan0%
Help with down payment funds
In addition to using a low down payment loan option, there are other sources of help for reaching your down payment:
- Gift funds: Each of the loan types mentioned above allow borrowers to use gift funds from friends or family toward their down payments and closing costs
- Gifts of equity: If you’re buying a house from a relative or friend, they can give you a gift of equity. This means they will sell you the house for less than the fair market value, and the difference between the sale price and the appraised value will count toward your down payment
- Down payment assistance: There are down payment assistance (DPA) programs in every state. DPA eligibility requirements vary by program, but can include a grant or a forgivable, 0% interest second loan
There are also conventional loan programs for low- to moderate-income borrowers that allow them to use income from a roommate or sweat equity toward their qualifying income and down payment. (Sweat equity refers to DIY-ing some repairs and renovations, and those improvements are credited toward your down payment.)
Buying a home with student loans FAQs
Can I buy a house with student loan money? There is no regulation or law against using disbursed student loan money to buy a house. But using debt to buy a house may not be prudent. Lenders will look at your income, employment, and debt-to-income ratio to ensure that you can afford your mortgage payments. Relying solely on student loan funds to buy a house may cause you to be turned down if you don’t have sufficient income to cover the monthly installments for the home and student loans.
Do student loans affect FHA loans? Lenders will calculate your student loan payments into your debt-to-income ratio (DTI) in one of two ways. If you are on an income-based repayment plan and your monthly payment amount is greater than $0, they will factor that number into your DTI. If your IBR payment is $0 or you are in forbearance, they will use 0.5% of your outstanding loan balance to determine your DTI.
Does having a mortgage affect student loans? Home equity is usually excluded from calculating the assets in the Free Application For Federal Student Aid (FAFSA), which is used by many schools to determine the amount of financial aid a student receives. (Generally, the greater the assets, the less the aid.) But not all schools exclude home equity, so it is possible that a mortgage and attendant equity in a house could affect overall student aid, including any loans you’re eligible to receive. Additionally, the amount of your mortgage payment may affect the amount of student aid you are awarded.
Homeownership in sight
If you feel ready to buy a new home but you’re worried about your student debt preventing you from getting a mortgage, know that your chances are probably better than you think. Your student loans are one of many factors that mortgage lenders look at while buying a home.
Having good credit, paying your bills on time, showing proof of steady income – all of these work in your favor, even if you’re still paying off your student loans. So don’t count yourself out, because that new home may be closer than you think.
*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.
**Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway. Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.