Mortgage Programs for Students

What To Know as a Student Homebuyer

A young couple embraces in a new home.
•••

urbazon / Getty Images

It can be a real challenge to apply for a mortgage when you’re paying off student loans simultaneously. According to one study from the Federal Reserve, a 10% increase in student loan debt among borrowers causes a drop of 1 to 2 percentage points in the rate of homeownership during the first five years after leaving school.

There are some ways you can make the process easier. Below, we’ll dive deeper into how student loans may impact your mortgage application, the income barriers you might face, and the mortgage programs available for student loan borrowers.

Key Takeaways

  • Your debt-to-income ratio as a student may hinder your ability to qualify for a mortgage.
  • Changes to FHA mortgages may make it easier to take out a home loan with student loan debt.
  • There might be local programs to support your dream of owning a home while you’re a student.

Income Barriers for Students Seeking a Mortgage

When you apply for a mortgage, lenders will consider your debt-to-income (DTI) ratio, which is all your monthly debt payments divided by your gross monthly income. It helps the lender measure your ability to make your monthly payments and repay your mortgage. Monthly obligations considered as debts might include student loan payments, alimony, child support, revolving accounts (such as credit cards), or car payments.

Lenders generally want to see a DTI of 43% or less.

The lower your DTI, the more attractive a borrower you are in a lender’s eyes. A lower ratio shows that debt eats a smaller portion of your income, so you have more money for your mortgage payments.

However, unless you work full-time while you go to school, there’s a good chance your DTI is higher than lenders would like it to be. While this doesn’t necessarily mean a lender will deny your mortgage application, you may have to settle for a lower mortgage amount.

“A student’s DTI often reduces the amount of mortgage loan they can take on" Jim Duffy, branch partner at Alcova Mortgage, wrote in an email to The Balance. "If they can't find a home in a much smaller price range, they may be forced to continue to rent."

How Student Loans Affect Mortgage Applications

Your monthly student loan payments are figured into the “debt” side of the DTI formula. Different lenders will see student loans differently.

For example, for FHA loans, a 2021 change meant that the actual monthly student loan payment on your credit report contributes to the DTI formula, as long as it’s more than $0 per month. If your student loan monthly payment is $0, then lenders will factor 0.5% of your total student loan debt into your DTI.

For conventional loans such as through Fannie Mae, borrowers on income-based repayment plans can qualify with a $0 payment, as long as they have documentation of that payment plan. For deferred loans or those in forbearance, the lender will factor 1% of the student loan balance if you’re paying $0 or less. Freddie Mac uses 0.5% of the total debt or your actual payment (as long as it’s more than $0).

More than 80% of mortgages insured by FHA are for first-time homebuyers. More than 45% of these borrowers also have student loan debt, according to FHA estimates.

Mortgage Programs for Borrowers With Student Loans

There are state mortgage programs specifically designed to help homebuyers with student loan debt. Here are a few examples.

SmartBuy 3.0 in Maryland

SmartBuy 3.0 is a program in Maryland that allows residents to buy a home and wipe out student loan debt simultaneously. As long as you have a 5% down payment, the Maryland state government will give you as much as 15% of the home's purchase price or $30,000, whichever is lower, to pay off your student loans. To qualify, you must live in Maryland and meet other specific requirements.

Student Loan Assistance Grant in Newburgh Heights, Ohio

If you buy a home in Newburgh Heights, Ohio, you may be eligible for a grant of 50% of your student loan debt, up to a $50,000 maximum. This program requires that you purchase a single-family home for at least $50,000 in the Village of Newburgh Heights and live in it for at least 10 years after the grant is approved.

To find local programs available in your area, check your local city website or the Department of Housing in your state.

How To Buy a House as a Student

While buying a house as a student is no easy feat, it's certainly possible. To turn your dream of homeownership into a reality, explore the requirements set by your local bank. Then come up with a game plan for improving your DTI. You may have to pick up a job or increase hours at your current job. If your DTI is high due to monthly student loan payments, investigate whether your payments are reported or calculated correctly. You could potentially qualify for a mortgage by using your actual debt payment amount, Duffy said, or by applying for an income-driven repayment plan with lower monthly payments.

Consider the long-term pros and cons of income-driven student loan repayment plans before signing up.

In addition, you might want to increase your credit score and save for a down payment, as most lenders will require a down payment. With some creativity and hard work, you may become a student homeowner.

Frequently Asked Questions (FAQs)

Can you use student loans to buy a house?

You can't use a student loan to buy a house. To buy a house, you'll need savings or gift funds to pay for the down payment, plus additional liquid funds (i.e. cash on hand or in an account) to pay for any other closing costs. You may be able to tap into other accounts to help pay for your down payment.

Why are home mortgages and student loans considered “good debt”?

Since a home will likely increase in value over time, it’s known as “good debt.” Student loans could also fall into the “good debt” category—they’re an investment in your future and may increase your marketability and earning potential.

Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!

Article Sources

  1. Federal Reserve. “Student Loans and Homeownership.”

  2. CFPB. “"What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?

  3. U.S. Department of Housing and Urban Development. “Mortgagee Letter 2021-13."

  4. Fannie Mae. “Selling Guide.”

  5.  Freddie Mac. "Monthly Debt Payment-to-Income Ratio."

  6. U.S. Department of Housing and Urban Development. “Federal Housing Administration Takes Steps To Remove Barriers to Homeownership for Those with Student Loan Debt.”

  7. Maryland.gov. "Fact Sheet: Maryland SmartBuy 3.0."

  8. Village of Newburgh Heights. "Student Loan Assistance Grant Program."