Does Student Loan Debt Affect Mortgage Applications?

Your student loans have an affect when buying a house

Real estate agent talking to couple outside a new house
•••

Maskot / Getty Images

If you're paying off student loans, you wouldn't be the first person to ask, "Can I get a mortgage with student loans?" Nationwide, 29% of people with student loan debt said that their student loans have delayed their purchase of a home, according to a 2021 report from the National Association of Realtors.

First, the bad news: your student loans will affect your ability to get a mortgage. The good news is it's still quite possible to get a mortgage even if you have student loans. It just depends on your situation.

Key Takeaways

  • It is possible to get a mortgage even if you have student loans.
  • Lenders use your student loan payment to calculate your debt-to-income (DTI) ratio.
  • You'll generally need to stay under a DTI ratio of 43% in order to get a mortgage.
  • If you're on a modified repayment plan, lenders have different ways of factoring your student loan payment into DTI calculations.

Factors That Affect Your Mortgage Approval

Your student loans will affect your mortgage in a few different ways. Here are the main things you'll need to think about:

Debt-to-Income Ratio

Lenders set maximum limits for what your monthly mortgage payment can be based on what percent of your income goes toward debt payments (the mortgage included). This is known as the back-end, or total, debt-to-income (DTI) ratio. From there, they back-calculate to see how big a loan you can take out responsibly. In most cases, you're limited to a DTI ratio of around 43%, although the specifics vary by loan type.

You can use this to calculate how much mortgage you might qualify for. For example, if your gross monthly income is $5,000, you'll need to keep all of your debt payments combined under $2,150 ($5,000 x 0.43). If you make a $150 student loan payment each month, that means you can afford a $2,000 monthly mortgage. Plug your details into a mortgage calculator to see how big a loan—that is, how much home you can buy—to remain under this threshold.

If you're on an income-driven repayment (IDR) plan, your monthly debt payment could be calculated in a few different ways, depending on your loan type.

Credit Score

Your student loan can also affect your credit score. If you've been making all of your payments on time, that could increase your score. If you've missed payments, doing so could decrease it.

Lenders also generally have minimum credit score requirements when you apply for a mortgage as well.

Student Loan Requirements for Various Types of Loans

In general, your student loans will have the biggest impact on your DTI ratio, which dictates how large a loan you can get. Here are the maximum back-end DTI ratios for the most common types of loans.

Type of Mortgage Maximum Back-End DTI
Fannie Mae (conventional) 36% for manually underwritten loans, 45% if you meet certain credit and down payment requirements, 50% for certain loans underwritten by software
Freddie Mac (conventional) 33 to 36% for most loans, 45% on a case-by-case basis
FHA 43% for most loans, 45% for FHA's Energy Efficient Homes program
VA 41%
USDA 41%

Fannie Mae

Fannie Mae isn't a lender that you apply to directly—rather, along with Freddie Mac, it's a government-sponsored company that buys mortgages from other lenders, the ones who you will be working with. These types of loans are called conventional loans, and they're the most common type of mortgage.

Fannie Mae has a few ways to handle loans that you're not repaying on a normal schedule. If you're on an income-driven plan with a $0 payment shown on your credit report, good news: That loan won't be factored into your DTI at all. If your loans are in forbearance or deferment, Fannie Mae calculates your payments as either 1% of your outstanding loan amount per month ($1,000 on a $100,000 loan, for example) or the actual, normal payment if you can provide documentation to your lender.

Freddie Mac

Freddie Mac uses a different calculation if you're paying off your student loans on a different schedule. In that case, it will calculate your monthly payment as the greater of:

  • 0.5% of your current loan balance (1% if your loans are in deferment or forbearance)
  • 0.5% of your original loan balance (1% if your loans are in deferment or forbearance)
  • Whatever's currently listed on your credit report

There's not really any way that Freddie Mac will qualify you with a $0 monthly payment like Fannie Mae will.

FHA Loans

The rules for how student loan payments for Federal Housing Administration (FHA) loans work were recently relaxed. Previously, your student loan payments were calculated as whatever was listed on your credit report, or 1% of your loan balance, whichever was greater.

But as of June 2021, it's either the amount listed on your credit report (if it's above $0) or 0.5% of your loan balance (if it's listed as $0 on your credit report). This swings things in your favor if you're not currently making payments on your loans. This effectively halves the "monthly payment" that lenders use to calculate your DTI and qualify you for a loan.

VA Loans

The Veterans Affairs (VA) bureau won't use a monthly payment for student loans if you can show that the debt will be deferred for at least a year beyond when you close on the loan. If not (and that's most of us), your lender will either use what's listed on your credit report or 5% of your loan balance, divided by 12.

USDA Loans

If you're on a fixed repayment plan, your lender will either use your current payment or 1% of your loan balance when offering a U.S. Department of Agriculture (USDA) mortgage. If your payment amount might change each year (such as with an income-driven plan), your lender will use 0.5% of your loan balance as your payment for the DTI calculations.

How To Qualify for a Mortgage With Student Loans

Having student loans while you're buying a home can put a bit of a damper on what type of home you can get. However, student loans don't completely restrict your ability to afford a home or qualify for a mortgage. If you seek out a good mortgage advisor, they'll be able to help you figure out what type of mortgage fits you best and how that fits into your overall financial life.

You might even want to take a step back and look at your home buying goals in the context of your finances as a whole. A general financial advisor may be able to help you identify ways to come up with extra money to afford a bigger down payment. They can also recommend money management strategies that can put you in a better position to buy a house in a year or two.

You should also consider the natural ups and downs of the housing market. If you try to buy a home in a seller's market, you'll have a lot of competition. If home prices are in the middle of a boom, you may be better off waiting for the market to cool off a little.

Frequently Asked Questions (FAQs)

Can I get a mortgage with student loans in forbearance?

Yes. However, lenders have different ways of calculating your debt-to-income ratio, given that your payment is currently $0 but will increase in the future. This can affect the size of the loan you might be eligible for, depending on what type of mortgage you get.

Can you refinance student loans with a mortgage?

Yes, if you have sufficient equity in your home (that is, if you owe less on your home than it's worth). You would use a cash-out refinance and use the cash you get back to pay off your student loans. Fannie Mae even offers a special student loan cash-out refinance mortgage for this purpose.

Article Sources

  1. National Association of Realtors. "The Impact of Student Loan Debt," Page 13.

  2. Consumer Financial Protection Bureau. "What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?"

  3. Fannie Mae. "Student Loan Debt Requirements: Scenarios and FAQs."

  4. Freddie Mac. "Bulletin 2018-13: Selling."

  5. U.S. Department of Housing and Urban Development. "Mortgagee Letter 2021-13," Pages 2-4.

  6. Department of Veterans Affairs. "Circular 26-17-02," Page 1.

  7. Department of Agriculture. "Single Family Home Loan Guarantees," Page 2.