So you want to buy a house but have student loans standing in your way?
Student loan debt is a significant factor when buying a home, which is often a family’s largest financial investment. A National Association of Realtors report found 46% of buyers ages 22-29 had student debt, twice the rate of buyers age 40-54.
It can be a hurdle to home ownership, experts say, but not one that has to be disqualifying.
Here are some tips:
Understand your debt-to-income ratio
One of the first steps to answering the “How much house can I afford” question is figuring out the debt-to-income ratio, or DTI. That’s the percentage of monthly gross income spent on paying debts.
When determining mortgage eligibility, student loans aren’t considered a separate category from other forms of debt, whether it be car payments, credit cards or medical debt, said Brian Rubenstein, senior director of mortgage and strategic initiatives at Ally Home. But, he said, it’s often the largest debt people have before buying a home, especially for younger borrowers.
There are plenty of online tools to help you estimate your DTI, including one from Money.com.
Determine the best loan payment plan
While many people have benefited from delaying payments during the pandemic, it might not be your best move if you’re looking to buy a house. During the COVID-19 pandemic, certain student loans automatically were placed in deferment, with payments not required through September.
Understand the difference between forbearance and deferment (interest accrues during the former but not the latter) and if you qualify for an income-based repayment plan.
Get on an payment plan that is affordable to your budget, McDuffie said. While putting loans on pause might be attractive to lower monthly bills, it could limit the size of the loan you qualify for. That’s because some lenders use a percentage of the overall loan in their calculations when the loan isn’t in active repayment.
That means for a $30,000 student loan, lenders might budget a $300 monthly student loan payment into your debt-to-income ratio, McDuffie said, when an income-based plan might set it much lower.
An appropriately-sized payment plan can also help avoid missed payments that hurt one’s credit score, another key factor for mortgage approval.
Consider all loan types
Some loan types can be friendlier to student debt than others. In June, the Federal Housing Administration announced changes to its loan calculations with respect to student loans. It will no longer use 1% of the borrower’s outstanding loan in its formula but rather the actual monthly payment.
Other federal mortgage programs such as those through U.S. Department of Veteran’s Affairs, as well as conventional loans backed by Freddie Mac and Fannie Mae, each have different calculations for student debt not in active repayment that can affect one’s ability to get a mortgage.
Get started early
Rubenstein said his biggest recommendation is to meet with a lender you trust and ask plenty of questions. Getting pre-qualified for a loan before deciding on a home is also a big help.
“The biggest thing for us is really making sure that folks are being fully immersed in the process,” he said. “Not only how does it work, but more importantly, asking the question and helping them navigate ‘How much home can I afford?’ ... whether it’s student debt or anything else they have going on in their personal life.”
In competitive markets like Charlotte’s, where homes sold in 12 days on average last month, clearing up financial questions can make someone more likely to have their offers accepted.