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How to Buy a House When You Have Student Loan Debt:  Thumbnail

How to Buy a House When You Have Student Loan Debt:

Student Loan Debt Housing

As younger healthcare professionals begin to grow their careers and their families, buying a house generally becomes one of their main financial goals. However,  according to a recent study by SoFi, 61% of millenials have delayed buying a house because of student loan debt.  While student loan debt means you have some important considerations to make before attending an open house, it doesn’t necessarily mean you can’t buy a home. Below are a few important tips to help you buy a home while managing your debt burden.

Tip #1: Focus On Your Credit Score

Your credit score can is an important factor in helping banks and lenders decide whether or not you’re eligible to receive a loan. It’s one of the pieces of information lenders collect as they assess your entire financial picture. The most common credit score scale ranges between 300 and 850, with anything above 700 considered good and any score above 800 considered excellent.2 Not only can having a good credit score help you secure a loan, it can also affect the interest rates of that loan. In some cases, the higher your credit score, the lower the interest rate.  You should always know your credit score before you go house hunting.  Their are multiple ways to find out what it is.  An easy source is annualcreditreport.com which is is a legitimate website that is federally authorized to provide you a free report once every 12 months.  It's also important to note that simply having student loan debt does not have a negative impact on your credit score as long as you have always been on time with your payments.  In fact, regularly making on time payments can be a good way for recent graduates to build up their credit history which can have a positive impact on your score.  

Tip #2: Evaluate Your Debt-To-Income Ratio

Surprisingly enough, it’s not always the amount of debt you have that can affect whether or not you’ll receive a loan. Instead, it’s the ratio of how much debt you have to how much income you receive. Find out what percentage of your gross income goes toward paying off debt (credit card debt, car payments, student loans, etc.) to determine your debt-to-income ratio. As you might expect, the lower the percentage, the better a chance you have at receiving a mortgage.  43% is the highest debt-to-income ratio that you can have if you want to qualify for a conventional mortgage,  but in order to try to qualify for the best terms, you'll want to try to keep your ratio below 36%.  If you are a healthcare professional who is saddled with a large amount of student loan debt, it's important to focus on eliminating any other debt (car payments, credit card debt, etc) before you apply for a mortgage.  If you are earning a substantial income and making sure your you are avoiding other types of debt, you still may have a good chance of qualifying for a mortgage at a reasonable rate.  

Tip #3: Understand the Underwriting Process When You Are On An Income-Driven Repayment Plan

All too frequently, big box lenders with inexperienced phone reps tell people they don't qualify for a mortgage because of their student loan debt when in fact they do.  How does this happen?  They don't understand the differences between the FHA, Fannie Mae, and Freddie Mac guidelines for calculating your debt-to-income ratio when you are making payments on a federal income driven repayment plan.  This is because the FHA guidelines force underwriters to use 1% of your total loan balance as your monthly payment in the DTI calculation.  Even if your payment is actually lower or even zero.  For example, lets say you are a resident with $200,000 in student loan debt, but you are on an income driven payment plan that actually results in a zero dollar monthly payment.  Your DTI ratio would still have to factor in $2,000/month in student loan payments under FHA rules.  However, if you apply for a mortgage through Fannie Mae, you can use your ACTUAL payment, even if it is zero.  Many loan officers either aren't aware of these different guidelines or simply don't bother to explore multiple borrowing options so they just stick with FHA rules and tell you no.   

Heads up:  Sometimes your credit report for multiple reasons doesn't correctly state your actual monthly payment amount.  If your monthly payments are different than what's being reported, you can have your mortgage company perform what's called a credit supplement.  This is used in the lending industry to verify credit amounts and payments.  It can solve any issues arising from the way your student loan servicer reports to the credit bureaus for mortgage qualifying purposes.  You may also be able to provide a statement in the form of a letter from your student loan servicer, detailing the specific amount due.  

Tip # 4: Get Your Loans Out of Deferment or Forbearance Before Applying for a Mortgage:  

There are additional underwriting guidelines when it comes to student loans that are in deferment or forbearance.  Even though you aren't currently making payments, Fannie Mae will require that 1% of the total principal balance of loans in deferment or forbearance be used in the DTI calculation.  For Freddie Mac this number is .5%.   So if you have loans being deferred or in forbearance, and you plan to buy a house, you should first switch to an income driven plan if the resulting monthly payments would be less than 1%.    Not to mention you should make the switch anyways if you will be shooting for Public Service Loan Forgiveness.  

Tip #5: Monitor Your Credit Utilization

Another important factor you have control over that lenders often consider is your credit utilization. If you’re looking to buy a home, you’ll want to work on keeping your credit utilization low. Credit utilization is the percentage of your credit limit that you spend every month. For example, if your credit limit is $4,000 and you spend $2,000, you’ve utilized 50 percent. Ideally, lenders like to see you using 30 percent or less of your credit limit. Here are a few ways to help keep your credit utilization low:

  • Pay off credit card debt multiple times a month

  • Inquire about raising your credit card limit

  • Set up a credit utilization alert with your provider

Tip #6: Explore Assistance Programs

The good news is, when it comes to buying a home - you’re not alone. There are programs out there to help certain home buyers afford a down payment, even if they have student debt. Some of the most common programs include federal loans through the Federal Housing Authority (FHA), USDA loans for those looking to buy a home in rural areas and VA loans for veterans. Depending on your unique circumstances, you could be looking at low down payment options or even no down payment at all.  Though you'll still have to consider how these agencies treat your monthly payments. 

You may also want to explore  Physician Loans.  The name can be misleading as these types of loans are not only offered to doctors but also other healthcare professionals such as CRNAs, Dentists, and Nurse Practitioners.  These types of loans are only offered by certain banks but they typically require little to no down payment and no PMI.  They also offer relaxed income documentation, and can be more understanding when it comes to your student loan debt.  They offer these benefits because they figure someone who has a multi-year degree in the medical field is at a low risk of default even if they have student loan debt.  

Summary

Just because you’re stuck paying back student loan debt doesn’t mean you can’t take on a mortgage. Instead of focusing on how much you owe, work instead to lower your debt ratios and optimize your financial standing where you can. This can help lenders see you as a responsible, money-savvy lendee who is ready to handle homeownership.   When you are ready to get serious about house hunting make sure you first get pre-approval from a loan officer who has experience in dealing with student loan debt.  Also keep in mind that all of these underwriting rules are there for a reason.  Before you buy you first need to decide if owning vs. renting makes sense.  You also need to consider how that monthly mortgage payment would impact the rest of your financial goals.  If your mortgage is going to cause you to overextend yourself financially and create ongoing stress, you may be better off waiting to buy until a later time.  

  1. https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/hhdc_2018q4.pdf
  2. https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/

Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.