Qualifying for a mortgage with student loan debt may sound like a long shot, but it’s actually very common. As more and more millennials and Gen Xers carry student debt into their 30 and 40s, it’s quickly becoming the only way most people can buy a house.
While getting a mortgage with student loans is entirely possible, borrowers in this situation do have to take a few things into consideration. Here’s what you need to know.
How to Qualify for a Mortgage with Student Loan Debt
Lenders will generally follow the 28/36 rule when approving a borrower for a mortgage, which dictates that borrowers should not spend more than 36% of their gross monthly income on all debt payments and a maximum of 28% on housing.
If you earn $2,000 a month and don’t have student loans, the maximum monthly mortgage payment would be 28% or $560. If you have a $300 student loan payment, the lender would only approve you for a $420 mortgage payment to prevent you from going over the 36% total debt ratio.
If you’re not sure what you qualify for, call a bank and ask to speak to a mortgage officer. While they won’t be able to pre-approve you over the phone, they can give a rough idea of how much you might be eligible for.
Those who want to qualify for a bigger mortgage can start by lowering their monthly student loan payment. For federal loans, this requires switching to an income-based repayment program. Those with federal or private loans can refinance for a lower interest rate and to a lower monthly payment.
You can refinance federal student loans into private loans, but you’ll lose all federal loan protections and repayment options. Some of these lost benefits include income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more. If you’re trying to have your loans forgiven under the Public Service Loan Forgiveness Program, then refinancing will take away that option.
What to Look for in a Mortgage When You Have Student Loans
First, look at how much you currently pay for rent and how much you have left over each month. You want to make sure you can comfortably balance the new mortgage with your current student loans.
Your mortgage should never be more than your rent, unless you still have hundreds of dollars left over every month. Owning a house comes with extra costs that renters don’t have to worry about. If the fridge breaks when you’re a renter, the landlord is responsible for fixing it. If the fridge breaks when you’re a homeowner, it’s all on you.
Go through your budget and see how comfortable you are with your finances. Is it ever stressful making rent? Do you wish you had more money each month for retirement or other goals? If so, consider applying for a mortgage that’s less than your rent.
Most mortgages come in either 15 or 30-year terms. A 15-year mortgage has a lower interest rate and higher monthly payments. Some experts say you should always choose a 15-year mortgage because you’ll save tens of thousands on interest.
For people with student loans, flexibility may be more important than saving on interest. A 30-year mortgage will have a lower monthly payment, allowing you to pay extra on the mortgage if you can afford it or put any leftover funds toward the student loans.
Borrowers also need to decide what kind of down payment they can afford. FHA loans have a 3.5% minimum down payment, while conventional loans have a 5% minimum.
Some experts say you should always put down 20% to avoid extra Private Mortgage Insurance (PMI), but that may not be feasible for borrowers with student loans. Again, consider your overall financial situation and how much you have in savings.
It’s not worth emptying your savings account to put down 20%. If you lose your job or have a medical emergency, you may struggle to make the mortgage and your student loan payments. Defaulting on your loans will set you back financially for years, so it’s better to put down a more modest down payment and retain your emergency fund just in case.
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