How Student Loans Can Hurt Your Mortgage Application

Whether you’re a parent proudly financing higher education for your child or a student signing on the dotted line for your own student loans, it’s important to understand how those debts can impact your future. Do parent PLUS loans affect getting a mortgage, for example? The short answer? Yes, any student loan you’re responsible for can impact your chances of getting approved for a mortgage. Find out more below.

In This Piece:

Do Student Loans Impact Getting a Mortgage?

Student loans are a type of debt. So if they’re in your name, they can impact your chance of getting a mortgage in the future. Luckily they can have a positive impact in some situations, especially if you have good financial habits. 

It’s important to note that student loans only impact your ability to get a house if you’re the one who’s responsible for paying the loan. Parent PLUS loans affect getting a mortgage if you’re the parent who’s signed as the responsible party, for example, but they wouldn’t impact your child’s chances at a mortgage. 

But if a student took out a loan with the parent as a cosigner, the loan impacts both people’s credit. It might impact the chances of getting a mortgage for either party.

How Do Student Loans Impact Your Ability To Get a Mortgage?

Student loans are often pretty hefty. The average cost of attending a four-year college or university is $35,331, so you’re looking at total loans that are tens of thousands of dollars. That’s nothing to scoff at, nor is it a small mark on your credit report. Find out how it impacts your mortgage application below.

Student Loans Reduce How Much You Can Save for a Down Payment

You may not have to start paying back your student loans until you’re out of college or a forbearance period has passed. But the time will come when you’ll need to make those monthly payments. Depending on how much you borrowed and what your terms were, student loan payments can be a big hit to your monthly budget.

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    That hit makes it harder to save money quickly for a down payment. While options do exist for mortgage loans with a lower down payment or even no down payment, not being able to save limits your choices. 

    Mitigate this impact by:

    • Asking your mortgage broker for information about options with low down payment requirements.
    • Applying for down payment assistance to help you cover the costs of down payments.
    • Working to increase your income so you can save more money.
    • Keeping other types of debts and expenses low to facilitate savings.

    They Increase Your Debt-to-Income Ratio

    Any amount of debt you have to pay back increases your debt-to-income ratio (DTI). Mortgage lenders look at DTI to understand whether you can afford the payments on any loan you take out.

    There’s not a single hard-and-fast rule for where your DTI needs to be to get a mortgage, but the Consumer Financial Protection Bureau notes that 43% is a good number to consider. That means your total debt payments monthly, including any prospective mortgage, should be no more than 43% of your total monthly income. Some lending programs may have stricter DTI requirements.

    Here’s an example to demonstrate how a student loan can change DTI. If you have student loan payments of $500 a month, a car loan of $500 a month and credit card payments totaling $300 per month, you have $1,300 in debt. If you want to get a loan to pay for a home and the loan would result in a $1,200 a month mortgage, that’s a total of $2,500 per month.

    If you only make $5,000 a month, your debt-to-income ratio would be 50%. That may be too high for a favorable mortgage loan to be approved. If you take out the student loan and keep all the other factors the same and the DTI is now 40%. That’s a better DTI for most mortgage loans.

    Offset the impact of student loans by reducing your other debts. For example, in the above example, you could work to pay off the credit card debt before you apply for a mortgage. You might also refinance the car loan, bringing your monthly payment down to $300. That would leave you with a 40% DTI.

    Student Loans Impact Your Credit Score

    Most lenders do report student loans to one or more of the credit bureaus. This is actually good news, because paying your student loans on time can help you build credit and have a positive impact on your credit score. On the flip side, if you miss payments or end up defaulting on your student loans, the negative impact on your credit can bring your score down and keep you from getting approved for a mortgage. 

    Keep this from being a problem by paying your student loans on time every month. Consider setting up auto bill pay so you don’t have to worry about accidentally missing a payment. You may also want to find out more about the required credit score to buy a house so you know what you’re shooting for.

    Does Applying with FAFSA Effect Buying a House?

    No, completing FAFSA doesn’t impact your credit at all. And it doesn’t mean you’re taking out a student loan. FAFSA simply lets you apply for any potential student financial aid that might be available for you. You’re then offered aid that you can choose from. 

    More Tips for Ensuring a Successful Mortgage Application

    Doing a bit of homework before you apply for a mortgage can increase your chances of success. Here are some things to do related to your student loans:

    • Consolidate multiple student loans into one if possible, which will reduce the total amount you have to pay each month. This makes it easier to save and can reduce your DTI.
    • If student loans report as deferred on your credit report, get the specific payment amounts from the servicer or a payment letter from the servicer stating an approximation of what the payments will be when they come due and payable.
    • Avoid any student loan delinquencies, especially in the last 12 months. Ignoring this could result in your application being denied for a government loan such as an FHA- or VA-backed mortgage. Government programs are strict about delinquencies on federal debt, which is what a student loan is.
    • If any student loans are paid in full but your credit report shows a current payment obligation, provide supporting documentation showing it’s been fully paid off to the mortgage company.
    • Review your credit reports before you start the mortgage application process. If there are inaccuracies on your credit reports related to student loans—or anything else—file a dispute and request the credit bureau to investigate and correct the information.  

    Learn More About Mortgages Today

    It’s also a good idea to learn more about how a mortgage works and read up on terms you need to know in a mortgage glossary. The more you know, the more confident you’ll be in the entire process. For the best information on your credit, consider signing up for ExtraCredit, where you can get 28 of your FICO scores and a report card that helps you understand what you need to do to improve your scores.

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