Getting a Mortgage with Student Loan Debt

By Eleanor Alexander on April, 6 2018
Eleanor Alexander
Eleanor Alexander

Eleanor is a copywriter, creative, and mac and cheese enthusiast. 

Student loans can help you achieve great things in academia and set you up for a successful future in your field of study. But being riddled with debt after graduation has its downsides.

The National Association of Realtors conducted a study in 2017 which found that 80% of millennials don’t own a home. Of those who don’t own a home, 83% said student loan debt was holding them back from purchasing a home.

One of the consequences of student loan debt is the impact they have on whether or not you’ll qualify for a mortgage. You may think you can handle a mortgage payment but your lender might disagree.

When determining the amount you can afford for a mortgage loan your lender will look at your debt-to-income ratio (or DTI). DTI is the percentage of monthly income you spend on debt. You have two kinds of DTI, your front-end ratio, and your back-end ratio.

Front-End Ratio

Sometimes also known as a housing ratio. This calculates how much of your gross income goes towards housing costs. To calculate your front-end ratio you divide your housing expenses by how much you earn and multiply that number by 100.

Your projected mortgage payment will be made up of the principal, taxes, insurance, and interest payments, commonly known as PITI, for short.

Limits on allowed front-end ratios vary from lender to lender. Typically, the limit is somewhere between 28% and 36%. However, if you have an FHA loan, borrowers are limited to a 31% front-end debt ratio.

Back-End Ratio

This ratio shows how much of your monthly income goes towards paying off debt. It includes your PITI, student loans, and other debts such as credit card payments.

To calculate this your lender will add your monthly debt payments and then divide that number by your gross monthly income.

Most lenders like to see a back-end ratio that’s under 36%. Some lenders have gone as high as 50% if you have excellent credit but this is rare. If you have an FHA loan you’re limited to a back-end debt ratio of 43%.

Other Factors and Options

There are several other factors that will affect if you can get a mortgage and other options as well. The size of your down payment is one such factor that affects your front-end ratio. The more you need to borrow, the higher your PITI.

Another thing to consider is your income. DTI is essentially the comparing of two variables, your debts versus your earnings. Having a higher income will improve your debt-to-income ratio and make your student loans less of an obstacle in getting approved for your mortgage.

Lenders will also look at how long you’ve had your job. When looking at your credit history, some lenders won’t accept your income unless you have at least two years of employment history. Depending on the lender, some even want to see you at the same employer for two years, other others are okay as long as you’ve stayed within the same industry.

One of the best things you can do is pay off other debts, such as your credit card, which has high-interest payments. You can also look for another house that is less expensive, which would have a lower PITI. Alternatively, you may be able to refinance your loan through a private lender at an even better rate than what you’re currently paying.

At the end of the day, student loans alone cannot stop you from getting a mortgage. Far more important is the effect of those loans on your DTI.

The bottom line is, you have lots of options when it comes to home buying. Feel ready to buy a house but haven’t saved up the 20% down payment? Learn more about your options when it comes to private mortgage insurance.