Student Loans Make It Harder to Buy a Home, But Here’s How You Can Make It Happen

published May 21, 2020
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Rising college tuition costs have left many, particularly millennials, saddled with a whole lot of student loan debt. On average, they’re $34,504 in the hole, according to a study from credit bureau Experian. Not only does repaying student loans make it tough for this generation to save money for a down payment on a home, but outstanding loans affect debt-to-income ratio—a major factor lenders consider when approving loans. The result? About 83 percent of non-homeowners cite student loan debt as the factor that’s holding them back from purchasing homes, per the National Association of Realtors.

Yet buying a home with student loans is possible, experts say. The proof is in the numbers, too: Some 40 percent of first-time homebuyers have student loan debt, according to the NAR study. While the debt does make it hard to transition from renter to homeowner, it is indeed possible.

“Debt of any kind can impact your ability to buy a home, but student loan debt is especially hard because many borrowers have repayment arrangements that can extend payments for upwards of 20 years, or even more,” says Brittney Castro, a certified financial planner with Mint and Turbo. “Meaning, borrowers can’t just simply wait to buy a home until they are out of debt, because those student loan payments are so long-lasting.”

Ahead, tips on how to buy a home with student loan debt from both financial advisers and those who have done it before. 

Get realistic about your budget

Don’t wait for a lender or real estate agent to tell you what you can afford, instead use your budget to serve as a benchmark for what is realistic and achievable for your own financial situation, says Castro, also the CEO of Financially Wise Inc., a Los Angeles-based financial planning firm. You can use an online mortgage calculator to help you estimate your potential monthly payment and look at how it would impact your finances. A personal finance app like Mint, which will help you set and stick to your budget, she says. 

It might be tempting to think if you’re paying $1,500 in rent you could afford a $1,500 mortgage. But Shannon Clark, a personal finance coach, cautions against this. She and her husband had $60,000 in student loan debt when they took on a $300,000 mortgage in Seattle, Washington and says it “nearly bankrupted us in the Great Recession.” 

“Consider what the rental prices are in your area compared to the cost of your mortgage, taxes, insurance, HOA fees, and maintenance,” she says. “If you suddenly couldn’t pay the mortgage, would you be able to rent out your home to cover the payment? If the answer is ‘no,’ think twice before buying. Renting may actually be cheaper for you anyway.”

Clark, and many other financial experts, say you should have an emergency fund of six months saved, so you wouldn’t want to completely deplete your savings on a down payment.

Put your student loan payments into a down payment fund during COVID-19

Because of COVID-19, the federal government has temporarily paused student loan interest and payments for six months on federal student loans. This could be a great time to use the payments you were making to save for a down payment, Castro says. Make sure you can start repaying your student loans when they become due again, as even one missed payment could ding your credit.

Consider refinancing your student loans

While your credit score can help you leverage a better interest rate, your debt-to-income ratio (or DTI) will determine whether you can qualify for a mortgage at all. Your debt-to-income (DTI) ratio needs to be at least 43 percent or lower, meaning your total monthly obligations shouldn’t exceed 43 percent of your gross income, which is your income before payroll deductions. Getting that ratio even lower can result in lower interest rates.

Student loans are a major factor in your DTI ratio, explains Travis Hornsby, CFA and Founder of Student Loan Planner, an organization that gives people strategies to help pay off student loans. 

“Depending on your situation, refinancing your student loans could cut your monthly student loan payment down and help to improve your DTI ratio,” he says.

You’ll be in the best position to refinance your student loans if you have a credit score in the high 600s and a steady income.

Pay down loan balances

While you may be able to qualify for a home with a DTI of 43 percent or lower, many financial advisors tell their clients they shouldn’t buy if their DTI exceeds 38 percent, says Patrick Boyaggi, CEO of mortgage loan marketplace Own Up. While there are financial benefits to purchasing a home, like building equity, it’s not the right choice for everyone, Boyaggi cautions, and you may be in a better position once you’ve eliminated some of your debt.

Take time to pay off those small loan balances or other debt before taking on the larger debt of purchasing a house, Castro recommends. “A lower debt amount, prior to purchasing, can mean an increase to your credit score and help you qualify for the best mortgage loan rate,” she says.

Ideally, to net you the best credit score, your credit card utilization stays under 30 percent. 

Make some compromises

While everyone’s budget is different, if you want to become a homeowner, hold off on taking out big auto loans for an expensive car or racking up credit card debt after you’ve graduated, recommends Brittany Hovsepian. She and her husband had student loan debt totaling $36,000 when they bought their first home for $136,000 in 2016 just outside of Oklahoma City. 

Hovsepian, now a real estate investor with The Expert Homebuyers, also recommends lowering your expectations for your starter home and sticking to looking at homes within your price range.

You may also need to look at buying in more affordable markets, since student loan debt will make it difficult to save for a down payment, says Holden Lewis, home and mortgage expert at NerdWallet

“Ultimately, you might have to move to a more affordable place, such as Dallas instead of Los Angeles,” Lewis says.

FHA loans, a popular program for first-time buyers, allow you to make down payments as low as 3.5 percent. With a downpayment of $7,915, you could get into a home in Dallas, where the median home price is $226,145, according to Zillow. But, in Los Angeles, where the median home price is $752,508, you’d need a $26,337 down payment.

So, while student loans certainly are a notorious homeownership hurdle, it is still possible to have a mortgage while paying off your education.