If you’re one of the more than 43 million Americans with student loan debt, you may be wondering if mortgage lenders will view those loans as a blot on your mythical permanent record. Fortunately, while student loan debt presents some challenges to buying a home, it’s not an insurmountable issue if you do your homework. Get your pencils ready … class is in session.

How do Student Loans Impact Home Loan Applications?

Mortgage lenders want to know that you can pay back your home loan, so your student debt is part of what they consider. And when you look at the total amount you owe in student loans, you may think you can’t qualify. However, a lender is less concerned with the total amount of your student debt and more concerned with how that debt compares to your income. Whether you owe $10,000 or $100,000, lenders are looking at your debt-to-income (DTI) ratio, which is your total amount of monthly debt payments divided by your gross monthly income.

 

Typically, 43% is the highest DTI a lender will accept, though most lenders prefer 36% or less. Government-backed loans allow higher limits. For example, U.S. Department of Agriculture (USDA) loans will accept 41%, and Federal Housing Administration (FHA) loans accept a DTI as high as 50%. U.S. Department of Veterans Affairs (VA) loans don’t have a maximum DTI, but high-DTI loans may need to go through extra layers of approval and meet additional requirements, like having a higher residual income.

Improving your DTI is simple math: You either have to increase your income or decrease your debt. Increasing your income may mean waiting for a pay raise or starting a side hustle, while decreasing your debt means paying down credit cards, paying off a car, or decreasing your student loan payments. (Switching from a standard repayment plan to a graduated, extended, pay-as-you-earn, or income-based plan may be an option. The U.S. Department of Education’s Federal Student Aid site has more information.)

The good news is that if you’ve maintained a good record of student loan payments, that counts in your favor, because it shows your history of managing debts responsibly. Conversely, late or missed payments will lower your chance of being approved.

Your DTI isn’t the only thing lenders look at. Another crucial number is your credit score, which is essentially like a grade credit reporting agencies give to you based on how you’ve managed credit. The minimum credit (FICO) score needed for a conventional mortgage is 620, though special loan programs are available for borrowers with lower credit scores. Beyond that, home lenders will look at your employment history (typically a minimum of two years) to see if you have reliable, stable income, as well as your assets, including checking and savings balances, investments, and retirement accounts.

What Should I Think About Before Applying for a Home Loan?

A mortgage is only part of the cost of homeownership. There are utility bills, insurance, maintenance costs, and other expenses associated with owning a home, so factor those in when determining how much you can afford to pay for a house. The single biggest expense, though, is the down payment. You’ve probably heard that you need to pay 20% down on a house, but many people put down less than that. According to the National Association of Realtors®, the average down payment in 2021 was just 12%, and homebuyers under 30 put down an average of only 6%. As with all loans, the more money you put down up front, the less you’ll pay in interest over the life of the loan, but don’t let that 20% figure keep you from exploring loan options, especially now when mortgage rates are near historic lows.

What if Student Debt Is Holding Me Back?

So you’ve run the numbers (and spoken with a mortgage lender) and found out your DTI is too high to qualify for a home loan. It’s easy to feel discouraged in this case, but don’t be. Follow these steps to improve your finances and get closer to your goal of owning a home.

1. Keep current on all your debt payments, including your student loans. If you’re having trouble managing your debts, talk with a credit counselor or financial advisor to arrange a repayment plan that works for you.

2. Avoid accumulating new debt, especially when you get close to starting the application process. Remember that all-important DTI number? It only has two parts: debt and income. And it’s easier to control spending than it is to increase your income.

3. Research your loan options and different loan types. Talking to a loan officer is a great first step for understanding what you qualify for and what terms are involved with each.

4. Monitor your credit, including your credit score. You can request one free credit report per credit agency per year via AnnualCreditReport.com. Follow the site’s instructions to report any errors you find, and follow up on the complaint resolutions. These reports don’t include your credit score, but you can sign up for a free credit score monitoring service online.

5. Start saving now. Even if homebuying is a ways off for you, start saving now for a down payment and emergency fund.

If you don’t quite have an A+ on your homebuying readiness, don’t give up. Just focus on the factors within your control and keep working toward your goal. Your dream home will be waiting for you!