Are Student Loans Impacting Your Ability to Get a Mortgage?

Do student loans affect your credit score? Can student debt affect your mortgage application? A lot of us have student loans, so these are hot topics on people’s minds as they consider buying a home in 2022. That’s why we put together this short article to help you understand how student loans affect buying a house.

How Student Loans Affect Your Credit Score

The first thing to talk about is your credit score as it plays a major role in how your mortgage rate is calculated.

Why is your credit score so important? Because it’s kind of like a report card to help lenders understand how well you manage your money. Someone with good credit is someone who pays their bills on time and probably manages their money well. Someone whose credit isn’t stellar may struggle with money management making them a higher risk for a mortgage.

According to Equifax, several things play a role in your credit score:

  • How many accounts do you have
  • The types of credit accounts you have
  • Used credit vs total available credit
  • Payment history
  • Length of credit history

Student loans are no different. They are a type of debt that you owe, so lenders definitely consider it as they do the underwriting process of your loan application.

What is considered good credit? We outline the ranges in our mortgage lingo blog post, but in general, you want a score of at least 670.

Student Loans Affect Buying a House, Thanks to a Lower DTI

Have you heard of the debt-to-income ratio or DTI? This is another important factor in the mortgage application process. It’s a way to help lenders understand how much money you have coming in vs going out every month. The ratio is calculated by dividing your monthly recurring expenses by your monthly gross income. For example, let’s say you have three debts:
  • A student loan payment of $200 per month
  • A car payment of $300 per month
  • A mortgage of $1,400 per month
That means your total monthly bills are $1,900 per month. On the income side, let’s say you make $65,000 per year or $5,417 per month. To get your DTI, just divide $1,900/$5,417 which comes out to 35%. What’s considered a good DTI? According to Investopedia, a ratio of 35% or less. That’s seen as manageable, making it more likely that you can pay your bills every month. In this case, it’s unlikely that your student loan impacts buying a house. But if your student loan payment was much higher – say $1,000 per month – your DTI would be higher and lenders would be more hesitant to offer you a mortgage.

Student Loan Payments Impact Buying a Home Due to Eating your Savings

One of the hardest parts of buying a house is saving up the down payment. While this is already hard in itself, having a backlog of student loans makes it even harder. If you’re paying $200 per month towards your student loan, that’s $2,400 per year. Over the course of 5 years, that’s $12,000 in savings you missed out on because you had to pay off your loan. While this is an indirect effect, we still thought it would be worth mentioning since it does play a factor.

Conclusion

Do student loans affect your ability to buy a house? Yes – they affect your credit score and DTI, and make it harder to save.

The good news is you can overcome these things! As long as you manage the factors you can control like your credit score and DTI, you will be able to qualify for a mortgage even with student loans.

Have any other questions about how student loans affect mortgages – or any other aspect of the mortgage process? Send me an email at lisa@lisafleckteam.com or call us at (775) 688-9100 and I’ll reach out as soon as I can.