How to buy a house with student loans: Process and tips

Gina Freeman
Gina Freeman
The Mortgage Reports Contributor
November 8, 2022 - 11 min read

Can you buy a house with student loan debt?

Student debt can feel like a big obstacle for first-time home buyers. Many would-be buyers aren’t even applying, worried that their debts will make homeownership impossible. But the truth is that homeownership and student debt aren’t mutually exclusive.

You can buy a home, get approved for a mortgage loan, and still make good on your student loans. The trick is to understand how mortgage lenders look at your debts and plan your budget accordingly. Here’s what to do.


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How student loan debt affects home buying

Student loans shouldn’t stop you from buying a house as long as you have stable income and a decent credit history. If you can afford rent while you’re paying off student loans, there’s a good chance you can afford monthly mortgage payments.

But before you apply, it’s important to understand how student loans will impact your mortgage application — and what you can do to improve your chances of qualifying.

Here’s a quick overview of what student loan borrowers need to know about getting a mortgage loan. We’ll go over each point in more detail below.

  • Student loan debt increases your debt-to-income ratio. When you apply for a mortgage, the lender will evaluate your debt-to-income ratio (DTI), which indicates the percentage of your monthly income required to repay your debts. Your student loan payments will be included as part of your monthly debts
  • Paying down your student loan balance reduces your DTI ratio. By reducing your monthly debt obligations, you’ll reduce your DTI ratio. This can increase your qualified mortgage loan amount and home-buying budget
  • Your student loan repayment status also affects your DTI. To reduce your monthly debt obligations, you can switch to a graduated repayment plan, request a longer loan student loan repayment period, or focus on reducing other monthly debt like credit card payments
  • Some loan programs are well-suited for student loan borrowers. There are a number of mortgages that work well for borrowers with student debt, including the FHA loan, the Fannie Mae HomeReady mortgage, and the VA loan. These programs may allow 100% financing, low down payments, and more

Yes, your student loan debt will affect your mortgage eligibility. But thanks to today’s flexible mortgage programs, you don’t have to wait until your student loan balance is paid off to buy a home.

If you qualify, you can buy a home now, stop paying rent, start building equity, and better your financial situation. Then you can upsize to a bigger home once your personal finances have improved, if you want.

How to buy a house with student loan debt

As a first-time buyer with student debt, there are a number of mortgage loan programs well-suited to finance your home purchase. Many allow for a low down payment or even zero down. And some programs can be flexible about your debt-to-income ratio — which is a big help when you have monthly student loan payments.

1. Standard conventional loan

Home buyers with student loan debt can apply for a standard conventional loan, just like any other borrower. You need only 3% down and a 620 FICO score to qualify. Although, if you can put at least 20% down, it will help you get approved more easily — and you can avoid private mortgage insurance (PMI) payments.

Other “compensating factors” can also help you qualify for a conventional loan when you have a high debt-to-income ratio. If you can’t make a big down payment, a high credit score or additional cash reserves in savings could help your case.

2. HomeReady or Home Possible loan

Fannie Mae’s HomeReady loan and Freddie Mac’s Home Possible loan could be perfect for first-time home buyers with student loan debt.

These conventional loan programs are specifically meant for home buyers with lower income and higher debt levels. You might be able to get approved with a DTI ratio of up to 50% with compensating factors, and a down payment of just 3% is allowed.

As a bonus, HomeReady and Home Possible have cheaper PMI rates than standard conventional loans. So buyers can often save on their monthly mortgage payments.

3. FHA loan

If you have large student loan debts and a lower credit score, an FHA loan may be the best option. Backed by the Federal Housing Administration, FHA loans allow for a down payment of just 3.5% with a credit score of 580 or higher. And FHA lenders can approve DTIs of up to 45% or even 50% on a case-by-case basis.

Keep in mind that FHA typically charges mortgage insurance premiums (MIP) until you refinance to a different type of loan or pay off your house. Because of this, conventional loans are often cheaper for home buyers who can qualify based on their credit scores.

You can learn more about FHA student loan guidelines here.

4. VA loan

A VA loan is typically the best option for any eligible veteran or service member. These loans are backed by the Department of Veterans Affairs and allow zero down payment. Plus, unlike FHA and conventional loans, there’s no ongoing mortgage insurance.

According to VA loan guidelines, the maximum debt-to-income ratio of 41% can be overridden if some of your earnings are tax-free income — or if your residual income exceeds the acceptable limit by 20% or more

5. Employment-based mortgage

Certain professions are known to come with high levels of student loan debt. If you’re a doctor, for instance, you might be paying off years of expensive medical school. And public service workers often have substantial student loan debt but lower salaries — making it tough to pay down loans and buy a home at the same time.

Luckily, mortgage lenders are aware of this. And many offer special home loan programs for these types of professions. Certain loans can be extra lenient about your student debt repayment plan or your employment history. And they might offer additional perks like reduced upfront fees. For more information, see:

Just make sure you compare these programs against standard home loan options so you know you’re getting the best deal overall.

6. Down payment assistance

High monthly debt could also make it difficult to save for a down payment and closing costs. In this case, look into down payment assistance programs (DPA) that could help you out.

DPA programs can offer a forgivable loan or an outright grant to help you cover the upfront costs of home buying. Typically, the money doesn’t have to be repaid unless you plan on refinancing or selling the home before a certain timeframe, usually between five to ten years

There are programs available in every state, and they’re often tailored toward first-time home buyers with moderate credit and income. You can ask your loan officer, Realtor, or real estate agent to help you find DPA programs for which you might qualify.


How lenders look at monthly student loan payments

Student loans affect your monthly budget which, in turn, affects your DTI. But there are ways to reduce your monthly student loan payments, which could improve your chances of mortgage approval.

Deferred student loan payments or income-driven repayment plans could help you qualify to buy a house — but it’s important to understand how lenders will view your debt. Even if you currently pay $0 per month on your student loans, there’s a chance the debt could still impact your home buying options.

Standard repayment plans

Under the standard repayment plan, monthly student loan payments are fixed and your debt is typically paid off in 10 years. As the Federal Student Aid site points out, “payments may be slightly higher than payments made under other plans” because you’re repaying more of the loan principal each month.

Higher student loan payments mean a higher debt-to-income ratio. So if you have large student loans, following the standard repayment plan could make it more difficult to qualify for a mortgage. The good news, though, is that lenders will have an easier time approving you because your monthly payment “in real life” is your monthly payment for qualification. This is not the case for other repayment types.

Deferred student loans

Under special circumstances, borrowers might qualify for student loan deferment or forbearance. This means payments are postponed for a period of time (although interest can still accrue on the loan).

If your student loans are deferred, you might think your mortgage lender would ignore them completely. After all, you’re not making monthly payments, so it seems like you could avoid the DTI issue altogether.

However, mortgage lenders take a different view. Due to rule changes in recent years, most loan programs no longer allow lenders to ignore deferred student loans or loans in forbearance. Instead, they’ll often calculate a minimum payment based on your outstanding loan balance.

For instance, FHA and USDA lenders will either use the full payment listed on your credit report or estimate a monthly payment of 0.5% of your loan balance, whichever is greater.

If your deferred loan balance is $20,000, for example, lenders will include a $100 (0.5%) monthly “payment” in your DTI — even if your real payment is $0.

Fannie Mae and Freddie Mac use a 1% estimated payment for conventional loans. The VA loan program is most lenient of all. As long as you can document that your deferred payments won’t start for at least 12 months, VA lenders do not have to count the student loan toward your DTI at all.

Income-driven payment plans (REPAYE, PAYE, IBR, ICR)

For home buyers with lower income, an income-driven repayment plan could potentially be the most helpful when qualifying for a mortgage. Depending on the plan, your payments will be capped at a certain percentage of your discretionary income.

“Depending on your income and family size, you may have no monthly payment at all,” says the Federal Student Aid site. In this case, lenders actually can ignore your student loans on your mortgage application.

Fannie Mae says that for conventional loans, lenders can use a $0 student loan payment for borrowers who document that their payment actually is $0 under an income-driven repayment plan. Again, you have to find a lender willing to go through the extra steps and document your $0 payment correctly.

Government-backed FHA, VA, and USDA loans may still calculate a payment as high as 0.5-1% of your loan balance.

Graduated payment plans

You might also ask your student loan servicer about a graduated repayment plan. A graduated repayment plan means your student loan payments start low, then rise every two years to meet the rising income of a typical college graduate.

With lower monthly payments, your debt-to-income ratio is reduced, which could potentially help you qualify for a home loan. However, some lenders may use future payments for qualification. So be upfront with your lender about your graduated payment before applying.

Tips to get mortgage-approved with student loan debt

If you’re among the millions of Americans with student loan debt, chances are you’ve wondered if you’re even eligible for a mortgage loan. As a student loan borrower, your ability to get approved for a mortgage is largely based on three main factors:

  • Down payment
  • Credit score
  • Debt-to-income ratio

Other traits matter, too, such as your employment history and assets. But these three are the most important. Here’s what you need to know about each one.

Down payment (at least 3%)

Down payments matter because the size of your down payment determines which mortgage loans you might be eligible for. For example, the VA mortgage and USDA mortgage both allow 100% financing. So if you qualify for either of these programs, you don’t need any money saved up for a down payment. Although you’ll still need cash for closing costs.

However, with no down payment, you would not be eligible for an FHA mortgage — which requires 3.5% down — or a conventional loan, which requires at least 3% down.

Most home buyers should aim to save at least 8%-10% of their target home price in cash to cover the down payment and upfront loan fees. The bigger your down payment, the easier it will be to get approved with a higher debt ratio.

Credit score (at least 580)

Your credit history and credit report matter because lenders use these to determine your creditworthiness. All loan types require that buyers meet a minimum credit score requirement. Some loan programs have higher minimum credit scores than others, but you can generally get approved with a FICO score above 580 as long as you meet other loan program requirements.

Debt-to-income ratio (below 43%)

Your debts might be even more important than your down payment or credit score when it comes to your home-buying budget.

Mortgage lenders don’t look at debt on its own. They look at it in relation to your monthly income. Known as your “debt-to-income ratio,” this calculation is believed to be the best predictor of whether you can actually afford to buy.

Why? Because your DTI ratio shows a lender how much money you have left over each month after paying obligations like auto loans, credit cards, personal loans, and — yes — student loans. The more of your budget that’s taken up by these other debt payments, the less cash you have left for mortgage payments.

Lenders often consider DTIs below 43% to be “good” and DTIs below 36% to be “ideal” — however, it may be possible to get approved with a DTI at 50% in some cases, if your finances are very strong in other areas.

How to figure out your home-buying budget

Student loans are the biggest debt many first-time home buyers carry. They can have an outsized impact on your mortgage budget compared to other forms of borrowing like credit card debt. But how do you actually crunch the numbers and figure out whether you can afford to buy a home?

1. Figure out your DTI ratio

The first step is to determine your debt-to-income ratio, factoring in student loans and any other debts you pay monthly. You can see a full list of debts that are and are not included in your ratio here.

The basic DTI calculation is simple:

  • (Total Monthly Debt Payments) / Monthly Pre-tax Income = Your DTI

For example, say your gross monthly income is $5,000. Each month, you pay $300 toward student loans, $250 on a car loan, and $200 on credit card minimum payments. In total, you’re spending a total of $750 — or 15% of your income — on monthly debts.

“Be mindful that if your student loan is in deferment or payments haven’t started yet, lenders typically still include student loan repayment in your DTI, which they estimate as being 1% of the total due monthly,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.

2. Estimate your monthly mortgage payment

Lenders typically want to see a DTI of 43% or lower when your housing costs are added to your existing debts.

Here’s how a 43% DTI works out with a $5,000 monthly income.

  • Maximum DTI: 43% (0.43)
  • 0.43 x $5,000 = $2,150

In this example, $2,150 is the most you can spend on monthly debts including housing. You can work backwards from this number to estimate your maximum mortgage payment.

  • Maximum debt payment: $2,150
  • Existing debts: $750
  • $2,150 - $750 = $1,400
  • Maximum mortgage payment: $1,400

Now you know you can likely spend up to $1,400 each month on your mortgage.

3. Use a mortgage calculator

Next, you can use a home affordability calculator, plug in your estimated mortgage payment, and find out how much house you might be able to afford.

Keep in mind that mortgage payments also include property taxes and homeowners insurance, so you need to factor in those things to estimate your budget correctly. A good mortgage calculator (like the one linked above) will include taxes and insurance to give you a more accurate estimate.

How to lower your DTI ratio with student loan debt

If you’ve run the numbers and your DTI is higher than you’d like, you can take creative steps to lower your ratio.

  • Consolidate your student loan debt. You might have multiple federal student loans, all with various loan balances and different interest rates. By consolidating these into a single loan, you can lump your principal balances together, hopefully at a lower interest rate. This would reduce the total amount of interest you’re paying each month
  • Request a longer loan repayment period. By lengthening your loan term to 15 years or 20 years, you can reduce the amount that you owe each month, which lowers your DTI. This will increase the long-term interest cost of your student loans but lower your monthly obligation
  • Pay down non-student debt. Lenders look at your cumulative debts, not just student loans. Reducing any amount you owe will positively impact your DTI, including credit card debt and installment loans

Possibly the best thing you can do is lower your student loan payments. If you’re able to defer or modify your loans, this could have a big impact on your DTI and your home-buying eligibility.

What are today’s mortgage rates?

Student loan debt might decrease your home buying budget, but you can still buy a house while paying student loans. It’s in your best interest to shop around for the lowest mortgage rate you can find. Compare mortgage offers from at least three lenders to be sure you’re getting the most out of your mortgage loan. You can start your preapproval right here.