Student Loans and Mortgages: How to Buy a House if You Have Student Loan Debt

FT Contributor
A student couple unpacking a box in their newly bought home.

Millennials are living with their parents in record numbers, with over 14 million adults between the ages of 23 and 37 still living at home. In the meantime, student debt for Americans collectively reached a staggering $1.5 trillion in early 2019.

The connection between the crushing nature of school loans and the inability for millennials to branch out on their own isn’t a coincidence. The increasing costs of both housing and education have made it difficult for young adults to qualify for mortgages.

Nevertheless, with careful preparation and some clever financial footwork, it’s still possible for those with student debt to buy a house on their own.

Table of Contents

Improve Your Credit

It all starts with your credit. A credit score is one of the key indicators that a lender will be looking for when they consider whether or not to approve you for a loan. A good credit score demonstrates your ability to manage credit over the long term — 35% of your credit score comes from your payment history alone — and can affect the interest rate you receive.

While the credit score required for a loan can vary widely depending on the financial institution where you’re applying, most conventional loans will require a minimum score of at least 620, although some government-backed loans have a lower threshold.

If your credit score is a bit lackluster, it’s best to take steps to remedy the situation as soon as possible.

Budget and Pay on Time

If you’re planning for your long-term housing and school needs, one of the best ways to build your credit score is through a slow and steady process. Begin by creating a dependable personal budget that takes into consideration all of your income and expenses.

Make sure to include things like student loans and auto loan payments in your calculations. Paying back loans like these on time over the years can do wonders to foster a healthy credit score. Also, consider scheduling payment reminders or even setting up autopay to be doubly sure that you make every payment on time.

Contact Lenders

If you have a variety of different lenders you’ve borrowed money from, contact each one and make sure you’re aware of all the details on debts you owe. Ensure each debt has a payment channel set up and nothing is being accidentally neglected.

Contacting lenders also can provide an opportunity to minimize any damage to your credit that may have taken place. For instance, if a late fee has been posted to your account, you may be able to have it removed if you have a history of good payments.

Add a Line of Credit

Opening up a new line of credit is a way to quickly raise your credit score. If you have more credit available, it can decrease your credit utilization ratio.

For instance, if you have $10,000 in available credit and you’ve used $5,000, your credit utilization ratio is 50% or $5,000 divided by $10,000. If you open up a new credit card for $2,500, your available credit would rise to $12,500, instantly making your utilization ratio 40% or $5,000 divided by $12,500.

It’s important to be careful when boosting your credit score in this way. Resist the urge to use a larger line of credit as an opportunity to borrow more money. This would leave you in greater debt and could even decrease your credit score rather than boosting it.

Improve Your Debt-to-Income Ratio

Another factor that a potential lender will be looking for is your debt-to-income ratio (DTI). While this doesn’t directly affect your credit score, a low DTI can positively impact your eligibility for a mortgage.

If you find that your DTI is too high, you should either increase your income or reduce your monthly expenses in order to improve it:

  • Consider picking up a side gig in order to boost your income.
  • Save money by creating meal plans, cutting out unnecessary entertainment, and looking for other ways to reduce spending.
  • As you cut out expenses, use the freed-up funds to pay down your debt quickly.
  • Look for ways to restructure your student loan payments, like setting up an income-based repayment plan.

Get Pre-Approved for a Mortgage

Once your credit score and debt-to-income ratio are satisfactory, you can begin to apply for pre-approval from lenders. This will give you a rough idea of what you can afford to spend on a home, all things considered.

How to Apply

In order to apply for pre-approval you’ll need:

  • Proof of income.
  • Proof of assets.
  • Proof of employment.
  • Proof of identity.

Once you gather these, provide them for each lender. Consider applying for pre-approval from multiple lenders at the same time in order to compare rates. Do this within a short window of time, though, as spreading the process out may result in multiple hard credit checks that could lower your credit score unnecessarily.

Research Assistance Programs and Loans

In addition to boosting your credit score, improving your debt-to-income ratio, and getting pre-approved, you can also look into different assistance options to help you qualify for a mortgage. These can come from a variety of sources, such as the federal government, states, cities, and private companies. Here are a few examples of what kind of programs to look for:

  • Loan programs: Including Federal Housing Authority loans, U.S. Department of Agriculture loans, and Veterans Affairs loans;
  • Grants and other assistance for homebuyers: Including first time home buyer credits, Housing and Urban Development dollar homes, and similar state and local programs;
  • Second mortgages: Second mortgages typically come in the form of home equity loans and home equity lines of credit. They are loans that can be established once you have equity in a home in order to help with other debts, like school loans.

Assistance Resources

  • HUD dollar homes are foreclosed homes that are sold for $1 to low- to moderate-income families (if the homes cannot be sold by the FHA within a specified amount of time). You can find out more about HUD dollar homes by visiting the HUD website.
  • Home equity loans and lines of credit must be applied for directly from a lender, such as a bank or credit union.
  • FHA loans are backed by the Federal Housing Authority. They exist to help those with low credit scores or limited funds for down payments secure a mortgage.

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