Can I Buy a Home if I Have a College Loan?

Can I Buy a Home if I Have a College Loan?

After graduating college and stepping into the “real world,” you may wonder what your next step should be. Many look forward to using their degree to get a well-paying job and eventually buy a home. However, some may feel that they’re ineligible for homeownership because of the looming shadow of student debt. 

If this concern is at the forefront of your mind, you’re not alone. According to a 2021 Federal Reserve report, four in 10 college graduates accumulate some form of education debt. 

Luckily, student loan debt doesn’t have to bar you from homeownership. 

You should know it’s possible to buy a new home, even while you’re paying back loans from college. The process may take a little longer and involve more strategic planning, but you can do it. Keep reading to learn how student loans affect the homebuying process and how you can tackle homeownership with your financial well-being in mind.

How Student Loans Affect the Homebuying Process

According to the National Association of REALTORS®, 51% of student loan debt holders say their debt has influenced their ability to buy a home. The association also reports that 37% of first-time homebuyers have student loan debt of around $30,000. While these statistics may be disheartening, they show that buying a home is possible, even when you have student debt on the table. 

Nonetheless, outstanding student debt complicates homebuying in a couple of ways.

First, you’ll need to acquire a steady income before you can handle a mortgage and monthly debt payments at once. Adequate income allows you to pay off your student loan balance promptly to avoid damaging your credit. 

Monthly loan payments also impede you from saving for a down payment and closing costs. If you have other debt obligations – such as car payments, credit card fees, and child support – you might also be unable to afford a mortgage. In this case, mortgage lenders won’t approve your home loan application. 

Guide to Becoming a Homeowner While Paying Off Student Debt

In summary, student loans affect the homebuying process because they take away from your homebuying budget. Luckily, there are resources and strategies to simplify the process for you and your family.

The following sections will discuss steps you can take to buy a home while making student loan payments. We’ll explain the strategies and tricks you need to tackle the process without greatly increasing your financial stress.

Improve Your Credit Score

A lender will analyze your credit score to determine whether or not you’re eligible for a mortgage loan. This score is determined by a credit report that details your credit history, unpaid debts, credit applications, and current loan accounts.

Your credit score is important to the buying process because it shows lenders how likely you are to repay loans. You should aim to keep your credit score over 675 to be in good shape for loan approval. 

If you find that your score is on the lower end, you’ll want to improve that number before applying for a mortgage loan. The following steps can help you improve your credit score:

  • Start building credit as soon as possible. A longer credit history provides lenders more context into your financial behaviors and overall situation.
  • Pay your student loans – and any other loans – on time by using auto-pay features or reminders. If you miss a payment, fulfill it ASAP. If your student loan payment is late or “delinquent,” the lender will eventually report the missed payment to a national credit bureau, and your credit score will drop.
  • Don’t use all your available credit at once or “max out” your limit. This action signals to lenders that your financial situation is unstable.
  • Keep your credit utilization to a minimum. Only apply for the credit you need, aiming to keep applications few and far between.

Assess Your Debt-to-Income Ratio

Your lender will calculate your debt-to-income ratio to assess your loan eligibility before offering you a mortgage loan. A debt-to-income or DTI ratio is the percentage of your gross monthly income that goes toward existing debt payments. The lender uses this calculation to determine if a borrower can realistically handle a monthly mortgage payment on top of other monthly payments.

You can increase your chances of qualifying for a mortgage loan by calculating your DTI ratio ahead of time. Add up your monthly payments, including car loans, credit card payments, etc. Then, divide that number by your gross monthly income.

Example of DTI ratio calculation:

Item Monthly Payment 
Car Payments $400
Student Debt $300
Credit Card Debt $100
Mortgage Payments $1,200
Total Monthly Debt Payments $2,000
  • Suppose your gross monthly income is $7,000
  • Divide $2,000 by $7,000 to calculate your DTI ratio.
DTI Ratio 29%

Note that your monthly debt payments don’t include other frequent expenses like groceries, gas, utilities, and cellphone bills. It’s up to you to factor these costs into your monthly financial planning. If your DTI ratio is under 40%, you have a higher chance of qualifying for a mortgage loan. Ratios under 35% are ideal for lenders.

You can improve your DTI ratio by increasing your monthly income and paying off debts as quickly as possible. Consider strict budgeting, picking up a side gig, and paying above your monthly requirements.

Once your lender has calculated your DTI ratio, you’re one step closer to qualifying for a mortgage loan pre-approval. A pre-approval signals to the lender that you can handle a specific monthly mortgage payment in addition to your other expenses.

Find a Reputable Lender

Finding a reputable mortgage lender is crucial to your success as a first-time homebuyer. A good lender will take the time to communicate important information to you and ensure you know what contracts you’re signing. They’ll also help you find the best mortgage rate for your long-term needs instead of just cranking out numbers to get the job done.

Traditional lenders include banks, credit unions, and private mortgage loan companies. These establishments aren’t equal in lending, so do your research before selecting an option.

Using your bank as a lender may be a good option if you have an established relationship with the institution. However, banks often have stricter credit requirements and fewer loan options, which may exclude you from eligibility. However, mortgage lending isn’t the bank’s only priority, allowing for lower interest rates on your home loan over time.

If you opt for a loan from a mortgage company instead of a bank, beware that the company may sell your home loan to another company after closing. This pivot won’t affect your payment contract, but you’ll have a less direct relationship with your lender. 

On the other hand, mortgage loan companies are often a better choice for homebuyers with poor credit scores. These companies face fewer regulations than banks, giving them the flexibility to customize and tweak interest rates, payment plans, and loan offers.

If credit issues or debt-to-income ratio disqualify you from conventional loans, consider applying for a home loan from the Federal Housing Administration (FHA). FHA loans come from government-backed, private lenders to help lower-income and in-debt borrowers achieve their homeownership goals. These plans come with lower down payment requirements, lenient approval processes, and more funding opportunities than traditional loans. 

With a lower down payment, you’ll have to pay private mortgage insurance (PMI) and higher interest rates to cover the lender. Although these factors increase your expenditure over time, an FHA loan program is still useful for getting your foot in the door as a first-time buyer.

Refinance Your Student Loans

Consider refinancing your student loans if your interest rates are too high. Refinancing involves moving your existing loans into a new loan term with lower monthly payments, a longer repayment period, or a lower interest rate.

Refinancing is only available for those who acquire student loans through private lenders. Those who received federal student loans from the U.S. Department of Education are ineligible for refinancing. However, individuals with federal student loans are eligible for loan consolidation options like income-driven repayment plans and other loan forgiveness programs.

If you’ve already purchased a home but are struggling to meet your monthly payments, you could roll your student debt into your mortgage with Fannie Mae’s Student Loan Cash-Out Refinance program. This option lets you pay off your student loan and mortgage rates simultaneously with a consolidated interest rate. To qualify for this program, you must already have one full student loan paid off.

Find a Down Payment Assistance Program

A down payment is a large amount of money you pay upfront for your new home. The larger your down payment, the lower your monthly mortgage rates will be. This homebuying hurdle seems simple enough, but many lenders suggest saving up for a down payment that’s 20% of the home’s purchase price.

A 2020 report from the National Association of REALTORS® states that 13% of homebuyers found saving for a down payment to be the most challenging part of buying a home. Of those buyers, 15% said student loan debt holds them back from saving for a down payment.

If you’ve saved for your first home but still need some assistance with the down payment, consider applying for a first-time homebuyer program. Down payment assistance programs often operate on a state level to help local buyers achieve their goals. These programs offer options like grants, loan forgiveness, and lower interest rates to simplify the process for first-time homebuyers with good credit and a manageable DTI ratio.

Check the U.S. Department of Housing and Urban Development’s Local Homebuying Programs page to find down payment assistance options near you.

Reconsider Your Priorities

An important factor to remember before purchasing a home is that monthly mortgage payments are only a small part of the equation. Even if you can afford these payments over time, homebuying requires many other upfront costs – and none of them are cheap. 

Before deciding to buy, research your area’s real estate market to understand the full picture.

You may find that closing costs, realtor fees, and due diligence payments are too much for your budget to handle. In the same sense, you should probably hold off if buying a home would drain your emergency fund. 

Buying a home is a great goal to set for yourself, as well as a fantastic investment for your future. However, it’s not worth putting yourself in a devastating financial situation.

Final Thoughts

Buying a house with student loans is possible and common. The key to jumping this homeowner hurdle is to manage your budget, pay your bills on time, and utilize a wide range of financial wellness resources. 

Remember that while buying a home is an important step toward building your equity, it’s not worth digging yourself into inescapable debt. Before buying, ask yourself if you’re ready for another monthly financial commitment in addition to your student loan repayments. If the answer is yes, you’re ready to take steps toward finding the perfect home for you.

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