How to Buy a House with Student Loan Debt ($100k+)

If you’re concerned about your student loan debt affecting your chances of buying a home, you’re not alone. In fact, over a quarter of student debt holders say their debt has impacted their decision or their ability to purchase a home. Here’s what you need to know about buying a house with $100k student loan debt:

The good news: around 40% of first-time homebuyers have student loan debt. So, while it may make qualifying for a mortgage loan a bit more challenging, buying a house with student loan debt is completely possible.

Can I Buy a House with Student Loan Debt?

When people say, “buying a house with student loan debt is hard,” what they’re often referring to is the mortgage loan process. Like private student loans, you must be a creditworthy borrower to secure a mortgage loan with a competitive interest rate.

Unfortunately, student debt can impact how creditworthy you appear to a lender. That said, there are several things you can do to appear more creditworthy, and thus improve your chances of getting approved for a mortgage loan.

Work on Improving Your Credit Score

One of the most important factors in securing a mortgage loan is your credit score. Simply put, lenders want to be confident you’re a trustworthy borrower prior to lending to you. So, by examining your credit score, they can typically get an idea of whether or not you are.

>> MORE: What credit score is needed for a student loan?

Luckily for you, student loan debt typically won’t drag down your credit score too much, unless you’ve been missing payments.

If there are other aspects of your financial background that are bringing your credit score down, however, taking the time to improve it can help you qualify for a competitive rate.

Here are a few things you can do to improve your credit score:

• Pay all your bills on time. Payment history makes up roughly 35% of your credit score. So, as you can imagine, late payments can take a serious toll on your score. Therefore, if you’re struggling to pay your credit card bill on time, consider opting in to automatic payments. Rather than making your payments manually, your credit card company will pull the payment directly from your checking account. This will ensure payments are always made on time.
• Limit new credit accounts. Applying for a new line of credit will result in a hard inquiry, which will temporarily hurt your credit score. Therefore, if you plan on applying for a mortgage loan in the near future, hold off on applying for any other new lines of credit.
• Keep old credit card accounts open. Credit history is another important factor in determining your credit score. Each time you open a new line of credit, it adds to the length of your credit history. If you have a credit card you opened a while ago that you no longer use, keep it open. Closing it will shorten the length of your credit history which, in turn, can reduce your overall credit score.
• Check your credit report. Several credit card companies, banks, and other financial institutions offer free credit reports. If yours don’t, consider using the Annual Credit Report to get a free copy of yours. By viewing your full credit report, you can check for unknown errors, fraud, or potential identity theft that could be impacting your score. 

Lower Your Debt-to-Income Ratio

When mortgage lenders evaluate you as a potential borrower, they’ll examine your debt-to-income ratio (DTI). Your debt-to-income ratio compares how much you owe to how much you earn each month. Your DTI is used to assess your ability to make a mortgage payment on top of other debts.

There are two types of debt-to-income ratios to be aware of: front-end ratio and back end-ratio.

A front-end ratio is all of your housing expenses divided by your pre-tax income. When applying for a mortgage loan, lenders will consider your future monthly mortgage payment, including expenses such as property taxes and homeowners insurance, to calculate your housing expenses.

For example, if you make $8,000 pre-tax per month, and your future housing expenses are $3,000 per month, your front-end debt-to-income ratio would be 37.5%.

[3000 ÷ 8000 = 0.375 → 37.5%]

A back-end ratio is all of your monthly debt payments divided by your pre-tax income. In addition to the monthly housing-related expenses, a back-end debt-to-income ratio will factor in debt payments such as student loans, credit cards, and auto loans.

For example, if you make $8,000 pre-tax per month, and your future housing expenses are $3,000 per month, but you have an additional $250 student loan payment and $400 auto loan payment, your back-end debt-to-income ratio would be 45.6%.

[3650 ÷ 8000 = 0.456 → 45.6%]

When applying for a mortgage loan, lenders will pay closer attention to your back-end ratio as it provides a more holistic view of monthly expenses.

What Debt-to-Income Ratio is Needed to Buy a House?

Many mortgage lenders follow what is referred to as the “28/36 rule,” also called the “28/36 qualifying ratio.” The rule suggests that you should spend no more than 28% of your monthly gross income on housing expenses, and no more than 36% on all of your debt expenses, including debt like student loans and credit cards.

That means your front-end ratio should be no more than 28%, and your back-end ratio should be no more than 36%. However, some mortgage lenders work with borrowers with higher DTIs. In fact, Rocket Mortgage recommends aiming for a DTI of 50% or less to qualify for a conventional mortgage loan. That said, the lower your DTI, the better.

Tips to Lower Your Debt-to-Income Ratio

If you have a high student loan balance relative to your income, or vice versa, consider increasing your income or refinancing your student loan.

>> MORE: Should I Refinance my Student Loan.

Use Sparrow to help you find the best refinance rates. The Sparrow application shows you personalized rates from our 17+ partnering lenders. You can then compare refinance rates side-by-side, helping you narrow down your options to see which is best for you. 

By increasing your income, say, through taking on a side hustle or asking for a raise, you can reduce your overall debt-to-income ratio.

In this example, increasing your income by just $1,000 per month would lower your front-end ratio by around 4 percentage points and your back-end ratio by around 5 percentage points.

	Before	After Increasing Your Monthly Income
Monthly Pre-Tax Income	$8,000	$9,000
Monthly Housing Expenses	$3,000	$3,000
Total Monthly Debt Expenses	$650	$650
Front-End Ratio	37.5%	33%
Back-End Ratio	45.6%	40.5%

If increasing your income isn’t possible at this time, consider refinancing your student loan debt. Refinancing to a longer repayment period will decrease your monthly payment. Accordingly, it will lower your total monthly debt payments. In doing so, your debt-to-income ratio will drop.

For example, let’s say you were able to decrease your $250 monthly student loan payment to $100, making your overall monthly debt expenses $500 instead of $650. Even with the same income, your back-end DTI would drop around 2 percentage points.

Now, if you are able to increase your income and reduce your monthly debt payments, you may see a greater drop in your DTI. In this example, you would drop nearly 7 percentage points by increasing your income by $1,000 per month and reducing your debt payments by $150 per month.

	After Only Refinancing	After Refinancing and Increasing Income
Monthly Pre-Tax Income	$8,000	$9,000
Monthly Housing Expenses	$3,000	$3,000
Total Monthly Debt Expenses	$500	$500
Front-End Ratio	37.5%	33%
Back-End Ratio	43.75%	38.8%

It’s important to note that lenders care far more about your debt-to-income ratio than they do your total debt expenses. So, even if you have $100k in student loan debt, if your overall DTI is still within the ideal range, you’re in the green.

See What You Prequalify For

Prequalifying with a mortgage lender can help you see what you may qualify for, and thus, where you need to make adjustments to qualify for your desired mortgage loan. For example, if you’re only approved for a fraction of the amount you expected to qualify for, you can ask the lender how you could improve your application to prequalify for higher.

>> MORE: What student loan rates do I prequalify for?

When seeking a preapproval for a home, remember to consider the following:

• Lenders will evaluate your entire short-term financial history. If questioned, you will need to be able to explain where all of your income has come from.
• If you’re self-employed, your income will be under greater scrutiny. Accordingly, you may need to provide additional documents for income verification.

Once you have a preapproval, sellers are also more likely to take you seriously as a potential homebuyer. This can increase the likelihood of your offers being accepted.

Explore Down Payment Assistance Options

If your student debt is preventing you from having enough to save for a down payment, consider down payment assistance programs. These programs will help you cover the cost of your down payment if you are a first-time homebuyer. 

There are a few types of down payment assistance programs to look out for:

• Grants. Grants are considered a gift, meaning you never have to pay it back. (Yup! Free money.) 
• Forgivable loans. Similar to some federal student loan forgiveness programs, some mortgage loans are forgivable after remaining in the home for a set number of years. 
• Matched savings programs. Some banks, government agencies, and community organizations offer matched savings programs, allowing buyers to have their down payment savings matched. For example, if a buyer deposited $10,000 into an account, the partnering organization would add another $10,000 in to match it. Then, you can use that $20,000 toward your down payment.

Consider Your Budget

Before adding a mortgage loan into the mix, make sure you have a deep understanding of your current expenses. If you aren’t already tracking your spending, consider doing so.

You may find that you spend unnecessarily in certain areas. Therefore, by cutting those areas back even just a little bit, you could find more money to put toward paying off your debt or toward a down payment.

Be Willing to Make Compromises

If buying a house despite having student loan debt is a top priority for you, consider holding off on other “wants” for a bit. For example, rather than upgrading your cell phone, hold onto your current phone for another year, and direct what you would’ve spent on a phone toward paying off your student loan debt.

Likewise, if you don’t qualify for as much of a mortgage loan as you expected due to your debt, consider lowering your expectations for your first home. While a move-in ready home in the perfect location may be ideal, it may not be in budget. Be open to compromising on certain elements of the home to find something you like that also suits your current financial situation.

Final Thoughts from the Nest

Buying a house with student loan debt is entirely possible. However, there may be additional hurdles to overcome along the way, especially if you have a high loan balance in comparison to your income.

Be sure to calculate your debt-to-income ratio prior to beginning the homebuying process. The earlier you understand your broader financial situation, the longer you’ll have to make adjustments before applying for a mortgage loan.

If you do opt to refinance your student loan debt as a tactic for reducing your monthly debt expenses, use Sparrow. By completing the Sparrow application, you’ll be able to see what refinance loans you qualify for and at what rates. Then, you can compare your loan options side-by-side to be sure you’re picking the best one.