Student loan debt is one of the most discussed, debated, and written about issues in America right now. Student loans are basically the monetary boogie-man of the 21st century. When it comes to buying a house, they're also one of the top reasons people put off buying in favor of renting. In fact, a 2019 study found that “43% of college-educated Americans with student loans said they postponed buying a home because of their debt.”
From concerns about saving for a down payment to anxiety surrounding taking on more debt, student loans are certainly something to contend with when you’re considering buying a house. However, buying with student loans is far from impossible. So today we’re taking a look at how you can, in fact, buy a house with student loans.
What You Need to Know About Your Debt
One of the first things you should do, whether you’re trying to buy a house or not, is get to know your debt. With any kind of debt, it’s important to have a clear understanding of what you owe, your interest rate, the payment plan, and so on. That way, you can plan for future goals and confidently discuss your options with financial planners, lenders, etc.
If you’re hoping to buy a house, one of the main factors that lenders will be looking at is your debt-to-income (DTI) ratio. The majority of lenders follow the 28/36 qualifying ratio when considering you for the best rates. This ratio looks at two key percentages:
- 28% (or less) of your gross monthly income goes to total housing expenses
- 36% (or less) goes to total debt service (including the new mortgage payment you’re looking to add)
Having a higher DTI will by no means stop you from being able to get a mortgage. But it is something you’ll want to know and ideally lower before attempting to get a mortgage.
There are several other factors that you should look at ahead of time (since lenders definitely will). First is your payment history, for your student loans as well as any other debt you may have. Lenders want to see that you’ve made your payments in full and on time for any credit cards and loans you already have. Your payment history shows you’re responsible enough to make your mortgage payments.
You should also check your credit score (which you can do for free on sites like Credit Karma). Look to make sure that there’s nothing inaccurate on these reports ahead of time and see if there's anything you can do to boost them. Make sure to get any issues straightened out before going to a lender.
How Your Payment Plan Can Impact Your Mortgage Options
Another important factor to consider is your student loan payment plan. All federal student loans start on a standard 10-year repayment plan. Many borrowers opt to use a different government-run repayment plan or refinance.
Changing your repayment plan can be a lifesaver, especially for recent grads who often can’t afford the standard 10-year plan. But these changes can also impact your mortgage options. Refinancing and income-driven repayment plans in particular are worth noting.
Whether you have government-backed or private loans, refinancing can be a great option for a lot of people. Refinancing can allow you to consolidate loans from different providers. It can also lower your interest rate and/or monthly payments. It refinancing lowers your monthly payments, it would be beneficial since it would lower your debt-to-income ratio.
But before running out to start your refi process, there are other effects worth noting. Refinanced loans appear as new debt on your credit report, which can negatively impact your score. The impact varies depending on your situation. And if your refinancing results in lower payments (and a better DTI) it may still be worth it. But you should definitely discuss the benefits and drawbacks before deciding.
Another thing to note: NEVER refinance your student loans while in the middle of the homebuying process. Before or after is fine, but while in the middle of buying you need to hold off. Lenders check your credit again right before settlement, so you want to avoid any major changes until closing is final.
Income-Driven Repayment Plans
Income-driven repayment plans allow people to pay off their federal student loan debt at a lower rate. Your payment is based on what you actually making each year. There are several types, including income-based repayment (IBR), pay as you earn (PAYE), and revised pay as you earn (RePAYE). These plans require borrowers to recertify their financial situation once a year. Each year, your monthly payment is recalculated based on your monthly take-home income.
These plans are (understandably) popular. They offer most borrowers a more affordable option while retaining federal protections. These plans also offer debt forgiveness at the end of the plan’s set timeframe (20-25 years) if you remain in good standing. But while these plans can be extremely helpful in managing the monthly cost of your loans, they also complicate your ability to get a mortgage.
Income driven plans default back to the standard 10-year plan if you don't recertify each year. And because your payment is recalculated every year, the amount you pay isn’t what lenders are seeing on your credit report. The long-term plan is what most credit reports see, which is based on the standard 10-year plan. And the amount owed each month for the 10-year plan is substantially higher.
Getting a mortgage while on an income-driven plan isn’t impossible, but it’s certainly more complicated. You can find out more here. The most important thing to do is communicate your situation with your lender early on. The sooner you approach a lender and discuss your repayment plan, the better you can understand how it will impact your options.
What You Can Do Next
If you’re considering buying a house with student loan debt, the most important thing to do first is talk to a professional. By talking to a financial professional, you can get a better picture of your current situation and any steps you need to take to improve your lending options for your new home. Here are a few other important steps to take:
- Talk to a lender early on - This will give you an idea of your mortgage options
- Work on your credit score - Things like avoiding credit card usage and lowering your DTI ahead of buying a home can help boost your score and improve your chances, even with student loan debt.
- Look into programs for people with student loans and/or homebuying - A lot of states have programs to help you buy a home. Maryland and Virginia each have options for homebuying. You should also look into programs for veterans if you’ve served in the military.
Maryland SmartBuy 2.0 Program
One of the best programs we had to mention for buyers with student loan debt is the Maryland SmartBuyer 2.0 program. This state-funded program helps buyers looking to purchase a home in Maryland by paying off a substantial portion of their student loan debt. This student loan mortgage program is one of several programs run by Maryland to help make homeownership a reality. Paying off your student loans AND buying a house at the same time...you can’t beat that! Give us a call today to talk to one of our agents about taking advantage of this awesome program.
Finally, if you’re hoping to buy a house, it’s important to learn all about the homebuying process. Learning about the process will help you understand how factors like your student loan debt will impact your options. Our home buying seminars are a great way to learn the ins and outs of this process. You can also give us a call today to find out more about the best way to move forward with finding lenders.