How Student Loans Can Hurt Your Mortgage Application

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Anyone who has tried to apply for a mortgage and had student loans knows what it’s like to be scrutinized and questioned by the mortgage company over the impact of those obligations. Like other forms of debt, such as car loans or credit cards, student loans are in the same classification: debt made against income or rather an ability to repay. Just like all consumer debts, student loans can reduce the ability to borrow because they erode income. So let’s take a closer look at how your student loans can hurt your mortgage application, and what you can do to protect yourself.

Quick Life-Cycle — Student Loan To Home Loan

Student loans are reported on a credit report just as any other payment obligation. In many instances, the student loan payments are deferred, extended out into a future date when the payments kick-in– if they have not already. Lenders are required by law to account for all material debt known to them in the supporting documentation a borrower provides in anticipation of acquiring a home loan. Student loans are the wildcard because they can show a payment at $50 per month on an obligation all the way up through $100 per month and higher. It’s not so much the monthly payment per student loan that lenders have to overcome, but in most cases it’s multiple student loans with multiple lenders, each showing a payment anywhere between $50-$80 per month.

For example, a consumer’s credit report might show six separate student loans totaling $50,000, each with a payment of $80 per month. That translates to a $480 per month obligation, which can reduce borrowing power by upwards of $60,000!

Let’s look at the path for a student loan borrower who’s trying to buy a house:

  1. Consumer decides to take out various large student loans in excess of $50,000 (average amount) to pay for college tuition.
  2. Finishes college in hopes to land an occupation with the expectation of earning an income large enough to afford  student loan payments and a housing payment.
  3. Enter: Decision to buy a house.
  4. Consumer takes the next step: Speaks with a mortgage lender about purchasing a house.
  5. Student loan(s) resurface into financial picture negatively affecting purchasing power.
  6. Consumer’s expectation of purchase price becomes “subject to change” based upon all liability payments.
  7. Consumer purchases a house with student loan payments counted for and makes timely repayments of principal and interest on both mortgage and student loans.

How To Keep Your Mortgage Application From Being Denied

If a student hopes to someday buy a home, he or she would be well advised to avoid private lenders when obtaining a student loan. Private lenders charge significantly higher rates of interest and can contain shorter-term amortizations inflating the payment obligation, which is what the mortgage lender will use when trying to qualify you for a home loan.

Further tips:

  • If you have multiple student loans, consolidate them into one loan to reduce total student loan payments (speak to a lender first).
  • If student loans are consolidated and they don’t report that way on the credit report, the lender has to use the information they have showing the higher payments because that’s what the credit report reveals, unless further supporting documentation can be provided to show each loan has been consolidated into one new debt.
  • Avoid any student loan delinquencies, especially in the last 12 months. Ignoring this could result in your application being denied for a government loan. Government programs are strict about delinquencies on federal debt, which is what a student loan is.
  • 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.
  • If a payment letter cannot be obtained, the lender will use 2% of the principle balance to determine appropriate payment obligation for qualifying.
  • If any student loans are paid off in full, but your credit report shows there is a current payment obligation, provide supporting documentation showing that it has been paid off in full to the mortgage company.

*Credit Caveat — if a student loan is in deferment for 12 months or longer, only on an FHA Loan can the payment be omitted from the lender’s qualifying ratios. Qualifying ratios are used by the lender to determine your ability to borrow.

Qualifying for a Mortgage Out of College

If you are a former student, and have a limited work history and student loan debt, you can still potentially qualify for a home loan if your field of study was in direct relationship to your field of of employment. For example, you have a degree in accounting and you’ve recently taken a job as an accountant.

Furthermore, if you were previously a full-time student, and you were not required to file a federal income tax return, you can still qualify for financing as you were not required to file IRS tax returns.

Image: iStockphoto

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  • Cody

    I have the same question!

  • ScottSheldonLoans


    Thanks for the feedback. The point of the article was to share the impact student loans have on borrowing power. I agree, a further article about the relationship between debt, rates and PMI would be an excellent piece.As for your numbers, on a conventional loan can be petitioned to be removed after 24 months and 20% equity in the property.

  • ScottSheldonLoans

    The minimum payments on these student loans as reported on the credit report is what numbers that will affect your debt debt ratio. For example a $100 student loan payment could translate into 15k more or less in house price.

  • ScottSheldonLoans

    Generally, taking out a student loan “after” the house is bought is ideal Why? Because its debt not yet occurred. Lender’s rely on current debt not future liabilities.

    • RockieAnne

      I currently have a score of 601, and have applied for a USDA loan, where 600 is the minimum. I am also planning on going back to school, with the new semester starting July 29th. I have applied for a government loan, with the payments not being due until after graduation, or if I discontinue classes. Would it be better to push off my start date (it is an online college, and has mult enrollment dates) until Aug or Sept, to allow time for my loan approval process, and hopefully home purchase process, to complete?
      Currently, I have two paid judgments on my credit, and a secured credit card I just obtained a month ago to help raise my credit. It would seem to me that having any kind of activity would help my situation, since I only have one cc. But I wasn’t sure if the loan would even appear at all since I will not have to make payments for years?

  • Gerri Detweiler

    Tiffany – You need to talk with a lender to find out what your options are. If your husband quits his job now then you may have to qualify based on your income alone, particularly if he goes from being employed to self employed. I am not sure why you are hesitant to talk with a lender, but I recommend you find someone in the area where you hope to move. They can hopefully tell you what your prospects are, and if you are not ready to buy now can give you a game plan for the future.

  • Gerri Detweiler

    Yes that’s a potential problem and certainly makes it tough for people who move. But people still do move and buy homes. You’ve got a combination of challenges here – not very high credit scores, low down payment and change in employment. So I do think talking with an experienced loan officer would be best for getting a game plan in place.

    • ScottSheldonLoans

      Agreed Geri! Tiffany any lender that makes you feel rejected, should be fired. A good lender will take an assessment of your overall financial picture and give you proactive action steps to take to get qualified in the future if it cannot get accomplished now. If you can consolidate your student loans so your total monthly payment is lower, that will improve borrowing power, a good financial move. The key here like Geri says is to sit down with the lender and go over all material aspects to your credit, debt, income and assets. Based on what you said, I would have them pay particular attention to the debt and how that debt would affect your ability to qualify. The lender’s job obviously is to make mortgages, but it’s also to give people suitable financial choices with regards to qualifying and that is critically important. So invest the time in doing the research now to sit down with the lender letting the lender now this is a longer-term project and you need some proactive TLC to manage those liabilities so you can successfully pull this off in the future. Good luck and let us know how it goes!

  • ScottSheldonLoans


  • ScottSheldonLoans

    This very well might be a gray area. If those student loans are forgiven, it’s probably going to report that way on the credit report which very well might be a red flag for a mortgage lender. Any forgiven debt is not looked upon favorably with mortgage underwriters. That is something that might change in the future, but there is no telling what that might look like 5 to 10 years into the future from now. If there is any student loan debt presently due and payable on the credit report at time of application then yes it’s going to have to be factored into your debt to income ratio. The total amount of debt you have has zero bearing on your qualifying ability. All of the importance rests upon what the monthly payments are on those student loans. For example you could have a student loan payment on student loans totaling $300,000 at $1000 per month versus $100,000 in student loans at $1200 per month, and the payment scenario with $1200 per month would be considered worse in terms of qualifying for the mortgage.As for total loan lenders are concerned with the mortgage loan amount that’s what your question is? Loans to $417,000 are priced more favorably than loans exceeding $417,000 to the maximum conforming County loan limit.

  • Juliet

    If your loans are in forbearance Will that hurt a loan application

    • Gerri Detweiler

      I believe the same principles that apply to deferment apply to forbearance, but we will see if Scott Sheldon can comment.

    • ScottSheldonLoans

      Yes that very will hurt your mortgage chances but all depends on what the credit reporting says ask your lender about this upfront when applying.

  • Doug

    If you have 100K IN CASH, PAY OFF YOUR LOANS FIRST!!!

  • Gerri Detweiler

    Nikki – Scott tried to explained the steps for dealing with a student loan if you are going to get a mortgage above. Beyond that. you should talk with the lender that preapproved you about specific requirements. It’s a relatively small amount of debt so hopefully it won’t create any problems for you.

  • shay

    I am currently looking to buy a house. I have a secure job where i make a salary of around 25,600a year, and I have student loans of around 45,0000 these loans seem to be playing a very negative roll in puchasing a home as a single mother of 2. I currently am in an Income based repayment plane where my payments are zero and I am also enrolled in the Forgiveness Progran where in ten years my debt will be forgiven if i stay in a nonprofit job. I am currently having issues with lenders accepting me with these student loan debt, quicken loans took there offer off of the table stating i would need to take my loans out of IBR and start making payments, because, they were still inquiring interest and they needed to know what my payments would be. I have a credit score of 783. I have another local bank telling me all i need is to have a letter from loan company for the loans stating that they will be zero dollar payments for a year at signing and they can do the loan for me at 82,000. the only other debt i have is one credit card ($83 mon) and a car payment ($294 mon). Can you tell me if the bank is telling the truth because i dont want to go thru the whole process and get denied at closing because my student loan situation wasnt handled correctly. Thank you

    • ScottSheldonLoans

      First off all a big-name Internet lenders, like Quicken loans for example, want cookie-cutter borrowers that they can fund and churn quickly. That’s not you. You need a lender who can give you more hands-on attention. I would argue to say most borrowers need this as well. There’s a small portion of the market that doesn’t need this hand holding and as such, those lenders could be a good outlet for them. The best way to do this in order to get the largest bang for your buck, is to have those payments in forbearance or deferred specifically for 12 months into the future or longer. This way you will not need the payment as a factor calculated into debt to income ratio as it can be omitted subsequently bolstering your borrowing ability. You need to work with a lender who can structure that. Any chance you are looking for a loan in California? :) If not no worries, but that’s the structure you want. Additionally, this is guidelines for FHA loans, meaning FHA loans allow for this ability. If you’re applying for a conventional loan then yes, the lender will need the full payment, or rather the full proposed payment taken into consideration against your debt to income ratio which will lower your qualifying ability. Hope this helps in your home buying endeavor.

  • Credit Experts

    Tara —
    In many cases, that’s correct. You can read more here: How a Deferred Student Loan Could Keep You from Buying a Home.

    • Tara

      Thank you

      • Credit Experts

        You are welcome!

  • ScottSheldonLoans

    Tara if you are trying to get an FHA mortgage, and there is no later derogatory is of any kind on the student loan and there is no payment due for 12 months into the future or longer, the student loan payment would not affect your debt to income ratio. It could be omitted.

  • James Adams

    Ok, so I have finished school and have over 100,000 in student loans that are in IBR status showing $0 payment for the next 12 months and my credit score is 645. I was denied a mortgage due to my student loans. I understand how the 1% is figured in. However, if I paid $1 towards each of my loans (17 total) and stayed in IBR status, would that not allow me to circumnavigate the 1% requirement? The mortgage company stated they needed to see that my payments would not change for the next three years and the USDA does not permit letters of forbearance past the one year time frame. However, by showing a continuing payment of $17, this should appease them right?

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