Can Student Loan Debt Prevent You from Getting a Mortgage?
Can Student Loan Debt Stop You from Getting a Home Loan?
Today, more than 44 million Americans have student loan debt, with an average balance upwards of $37,000. If you’re one of them, you may wonder if that student loan debt can prevent you from getting a home loan. The answer: it depends. While you might not think that your student loan payment affects your ability to pay a potential mortgage payment, your lender might -- and that could spell trouble if you’re trying to buy a home.
How Student Loans Affect The Home Loan Approval Process
When analyzing your risk as a borrower, mortgage lenders look at several variables, but in terms of student loan debt, the two most important factors are your front-end debt-to-income (DTI) ratio and your back-end DTI ratio. Your front-end DTI ratio, sometimes referred to as your housing ratio, can be determined by this formula:
Prospective Monthly Mortgage Payment/Gross Monthly Income (income before taxes)
For example, if:
Your income was $40,000, or $3,333 a month
Your prospective monthly mortgage payment, consisting of PITI (principal, taxes, insurance, and interest) is $1,000
$1,000/$3,333 = 30% front-end DTI ratio
Most lenders have front-end limits of between 28% and 36%, while the current front-end limit for FHA loans is 31%.
In comparison, your back-end DTI ratio also includes any debt obligations you might have, including credit cards, child support payments, and, of course, student loans. Your back-end DTI ratio can be determined by this formula.
Prospective Monthly Mortgage Payment + Monthly Recurring Debt Obligations/Gross Monthly Income (income before taxes)
For example, if:
Your income was $40,000, or $3,333 a month
Your prospective monthly mortgage payment, consisting of PITI (principal, taxes, insurance, and interest) is $1,000
You have a credit card payment of $25 a month
You have a student loan payment of $175 a month
$1,200/$3,333 = $36% back-end DTI ratio
In most cases, lenders prefer a back-end DTI of less than 36%. Despite that, back-end requirements may be flexible if you have a really great credit score -- and some lenders may even accept back-end ratios of up to 50% for some borrowers. FHA loans, by comparison, require a back-end DTI ratio of 41% or less.
Income and Employment History Also Affect Mortgage Eligibility
In the end, it’s not necessarily the fact that you have student loans that puts you at a potential disadvantage during the mortgage approval process. Instead, it’s how those loans affect your perceived risk as a borrower. Other related factors that may influence your eligibility include:
Income: Because lenders use different versions of DTI to determine your eligibility, your student loan debt might not really matter as long as you’re still making a good amount of income relative to your monthly student loan payments.
Employment history: Some lenders may want you to have had the same job for two years before accepting your income numbers. So, if you just graduated, it may be difficult for you to get a home loan, at least for a while.
So, in order to prepare to buy a home, you may want to look at ways to boost your DTI, like paying off high-interest credit card balances, and finding ways to increase your income (it could be time to ask for that raise!) Also, you could save up more dough in order to make a larger down payment, reducing your PITI. Either way, buying a home with student loans might be a little more challenging, but it certainly isn’t impossible!