How Can I Buy a House With Student Loan Debt?

You can buy a house even if you have student loan debt if you meet the lender's credit standards and their requirements for how much of your income can go toward debt payments. In that respect, student loans are no different from other types of debt.

But if you've deferred your payments or are in forbearance or an income-driven repayment (IDR) plan, lenders might calculate your student loan payments differently, which can make it look like the payments are higher than they actually are. While that won’t keep you from being approved, it could make approval more difficult.

Key Takeaways

Here's what to know before you apply for a mortgage with student loan debt:

• You can buy a house with student loan debt. Lenders care more about your monthly payments than your total balance, and student loans are weighed like any other monthly obligation in your debt-to-income ratio.

• DTI is the number that matters most. Conventional lenders often look for a back-end DTI around 36%, but you may qualify with up to 45% to 50% if you have strong credit, cash reserves or other compensating factors.

• $0 payments don't mean $0 in underwriting. If your loans are deferred, in forbearance or on an IDR plan with a $0 payment, lenders assume a payment: Fannie Mae uses 1% of the balance in some cases, while Freddie Mac and FHA generally use 0.5%, subject to documentation and program rules.

• FHA loans use 0.5% of your balance for deferred or $0-payment loans, a change from the old 1% rule after HUD's 2021 update — so a $50,000 balance counts as roughly $250 a month.

• Documentation can lower your assumed payment. A servicer letter or statement showing a lower actual IDR payment may let the lender use that figure instead of the estimated percentage.

• Prep work improves your odds. Check your credit reports for errors, lower your DTI, avoid new debt and build savings for the down payment, closing costs and reserves before you apply.

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Can You Buy a House With Student Loan Debt?

Buying a house with student loan debt is absolutely doable. Lenders might even ignore your balances because they’re more interested in your monthly payments. They view your payment amounts in the context of your overall debt obligations to determine whether your mortgage payments would be affordable. But lenders look at your overall financial picture and base lending decisions on many factors. For example:

• Debt-to-income ratio (DTI), which compares student loan and other debt payments to income

• Types of debt

• Credit score and payment history

• Income and employment stability

• Down payment amount

• Loan-to-value ratio (LTV), which compares the loan amount to the home's value

• Savings (cash reserves)

• Mortgage type

Most mortgage loans have some flexibility with DTI if you have one or more “compensating factors” that allow lenders to overlook weakness in one area of your application if strength in another area makes up for it.

Can I Buy a House if I Have Student Loan Debt?

Yes. You can buy a house if you have student loan debt as long as you meet the lender's requirements for:

• Credit score and credit history

• Income and employment

• Debt-to-income ratio

• Down payment

• Loan-to-value ratio

How Student Loans Affect Mortgage Approval

Student loans affect mortgage approval because lenders include your monthly payments in their debt-to-income ratio, or DTI, calculations. Therefore, it's important to understand the relationship between your student debt and debt-to-income ratio.

DTI is a straightforward calculation if you're making regular student loan payments. But things get more complicated if your credit report shows $0 monthly payments because of deferrment, forbearance or an income-driven repayment plan, and you don’t have documentation showing your regular payment amount.

In that case, lenders use a standard percentage of your loan balance to account for what your payments might be later. The standard for conventional mortgage loans is 1%, for example, and the standard for an FHA loan with student loans in deferral/forbearance/IDR is 0.5%.

Note that if your IDR payment is actually $0 and you have documentation to prove it, the lender may be able to count it as $0, helping your chances of approval.

Student Loan Balance vs. Monthly Payment

Your student loan balance tells lenders how much you’ll pay over time. That figure is far less relevant than your monthly payment amount when it comes to determining how likely you are to make mortgage payments on time.

But if your student loan payment is currently $0 because your loan is deferred or in forbearance, or you're using an income-driven repayment plan, the lender will use your total outstanding loan balance to assume a payment amount for its DTI calculation. The assumption is 1% for a conventional loan, for example, so if you have a $50,000 outstanding balance, the lender will use a $500 monthly payment in its calculation.

How Lenders Evaluate Student Loans

The following table shows how lenders view student loans as part of your overall financial situation.

How To Improve Your Chances of Buying a House With Student Loans

Advance preparation will increase your chance of being approved for a mortgage despite student loans.

Steps To Take Before Applying

Take these steps before you apply.

1. Review credit reports. Check for and dispute errors, and look for past-due accounts you need to make current. Order a combined credit report here.

2. Calculate your debt-to-income ratio. Divide your total monthly debt payments, with and without the housing payment, by your gross monthly income. You can use this mortgage calculator from Freddie Mac to estimate what your mortgage payments might be based on your budget and down payment. The maximum for a conventional loan is 36%, but you can be approved with up to 50% if you have outstanding credit, substantial savings or other compensating factors. 

3. Discuss student loan treatment with lenders. Find out how your student loans might affect your DTI.

4. Gather loan documents. Keep documentation showing your outstanding balance and monthly payments handy.

5. Avoid new debt and consider paying down existing debt. The less debt you have, the stronger your DTI.

6. Build savings. You’ll need cash for your down payment and closing costs. Having additional savings strengthens your application.

7. Seek a mortgage pre-approval. A pre-approval gives you a good idea of whether or not you qualify for a mortgage loan, and if so, how much you might be able to borrow. 

Should You Pay Off Student Loans Before Buying?

Paying off student loans can be helpful in some situations, but it’s unlikely to make much difference in others. 

Consider paying off your loans if:

• Your DTI is high.

• You can repay the loans without depleting your savings.

Don't pay off the loans if:

• Your DTI is low.

• You carry credit card balances.

• Repayment would reduce your down payment and/or leave you without money for closing costs or cash reserves

When It May Make Sense To Wait Before Buying

Homeownership can be a heavy burden if you're not ready for it. Signs that you might be best off waiting include:

• High outstanding debt balances/payments

• Low credit score, recent history of late payments

• Student loan delinquency or default

• Insufficient cash for a down payment and closing costs

• Unpredictable income

• Unstable employment history

• Affordability concerns, especially if mortgage payments would be significantly higher than current rent 

Apply Now or Wait?

Use this comparison table to decide if you should buy now or take time to strengthen your financial situation.

Getting a mortgage with student loans isn't just possible – it's often no different from getting a mortgage with any other type of debt.

Lenders are interested in your total monthly debt payments, regardless of source, as a percentage of your income. Their formulas might inflate your student loan payments if your current payments are $0, but you can compensate for that by avoiding new debt, paying down existing debt and building savings for your down payment, closing costs and emergency reserves.

Do a thorough review of your credit and debt before you apply for a mortgage so you understand what lenders will see when they process your application. 

FAQs

Here's more information about student loans and homebuying.

Do student loans count against you when buying a house?

No, not if you've always paid on time. However, lenders do count your monthly debt payments, including student loan payments, in debt-to-income calculations. A high DTI works against you.

Can I get a mortgage if my student loans are deferred?

Yes. The lender will use the payment amount in your loan documentation or, if you don’t have documentation, a percentage of your outstanding balance to calculate your DTI.

Should I pay off student loans or save for a down payment?

Pay off student loans if you already have enough money for a down payment, closing costs and cash reserves, and you want to reduce your DTI. Otherwise, focus on your down payment.

Key Terms

• Debt-to-income ratio (DTI): The share of your gross monthly income that goes toward debt payments. Lenders use it to judge whether you can afford a mortgage alongside existing debt.

• Income-driven repayment (IDR): A federal student loan plan that sets your monthly payment based on income and family size, sometimes as low as $0.

• Deferment and forbearance: Periods when student loan payments are temporarily paused. The debt still counts in DTI even when no payment is due.

• Conventional loan: A mortgage that follows Fannie Mae or Freddie Mac standards. The two have different rules for counting $0 student loan payments.

• FHA loan: A mortgage insured by the Federal Housing Administration that allows lower credit scores and down payments, and uses 0.5% of the balance for $0-payment student loans.

• Loan-to-value ratio (LTV): The loan amount compared with the home's value. A larger down payment lowers your LTV.

• Compensating factors: Strengths such as high credit, large reserves or a low LTV that let a lender approve you despite weakness in another area, like a higher DTI.

• Soft inquiry: Checking your own credit report, which does not affect your credit score.

Sources

• Annual Credit Report. Request Your Free Credit Reports.

• Freddie Mac. Monthly debt payment-to-income (DTI) ratio.

• U.S. Department of Housing and Urban Development. Mortgagee Letter 2021-13.

• Consumer Financial Protection Bureau. What Is a Debt-to-Income Ratio?.

• Fannie Mae. Selling Guide B3-6-05, Monthly Debt Obligations.

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