OK, so you’ve graduated college, gotten a decent job and would absolutely love to buy a house. You might even be crashing open houses in the neighborhoods on your buy list, binging on pretzels and chatting with real estate agents just to get the warm fuzzy associated with buying your own piece of the planet. The only problem is, you’re one of the 43 million people in this country who is strapped with student loan debt, and you’re dragging it around like a ball and chain.
Is it still possible to get a mortgage?
Yes, it is possible to get approved for a mortgage with student loan debt — in fact, it might even be easier to secure a mortgage because you have already established a credit history with your student loans, said Brendan Coughlin, head of consumer lending at Citizens Bank.
Hopefully, you’ve been regular with your student loan payments to keep your credit score as high as possible, which will reflect favorably on your mortgage rate and application process. A bad credit score, whether related to missed student loan payments or otherwise, can make it harder to secure a mortgage, at least at an affordable interest rate. (It’s prudent to check your credit before buying a home, and you can see two of your credit scores for free, updated every two weeks, at Credit.com.)
Is a Mortgage’s Interest Rate Higher With Student Debt?
There’s no set formula that says your interest rate will be a point higher with, say, $30,000 in student loan debt, because they’re calculated on a person-by-person basis, said Coughlin.
“When applying for a mortgage, lenders look at a potential borrower’s overall creditworthiness, their ability to pay back the amount they are looking (to borrow), as well as any collateral they have. However, unless you have substantial student loan debt, it is unlikely to impact your interest rate significantly, if at all,” said Coughlin.
But, generally speaking, when it comes to debts and mortgages, you’ll get a lower rate the less debt and the better credit that you have, said Mindy Jensen, community manager of BiggerPockets.com, a real estate networking and information site.
“The lender looks at your debt-to-income ratio, and it can be no higher than 39 to 43%, typically,” Jensen said. “The lower, the better, so if you’ve got significant student loan debt but a low-paying job, you’re going to have a much harder time.”
Student loans can also affect how much mortgage you can qualify for, so you’ll want to talk to a loan officer before you start shopping for a house, said Jensen.
They can also affect your ability to come up with a sizable down payment — which helps to keep your loan payments lower over the course of the loan. Lenders usually prefer people who are able provide large down payments — if you can’t, then high student loan debt coupled with a low down payment will make you look like more of a risk to lenders, said Jensen.
“The closer you are to a 20% down payment, the better your borrower status or the less risky you appear,” she said.