Can student loan debt affect getting a mortgage?
Senior Associate, JPMorgan Chase
Student loans typically function similarly to other types of loans and credit card debt when it comes to your ability to get a mortgage. This means buying a home may be possible despite having student debt.
Continue reading as we break down how student loans might impact your ability to get a mortgage and the steps you can proactively take if you have student loans and want to pursue a mortgage.
Do student loans affect getting approved for a mortgage?
When you apply for a loan, including a mortgage, lenders will most likely examine your debt-to-income ratio (DTI). Your DTI is all your monthly debt payments divided by your gross monthly income.
Your student loans will matter in terms of the following:
- What your monthly payments are for your student loans (note: lenders will assess this differently if your student loans are in deferment or forbearance)
- How they stack up among your other debts
- The amount of money you bring in (your income)
It’s important to note that student loans usually don’t affect your ability to qualify for a mortgage any differently than other types of debt you have on your credit report, such as credit card debt and auto loans. Most lenders care about the size of your monthly student loan payments, not the total amount of student loan debt you have.
Lenders also want to see whether you’re a responsible borrower. Lenders will use the payment history for your student loans to assess your creditworthiness (this is reflected in your credit report and FICO® score, the credit score most lenders use to consider applicants). Another factor that lenders will evaluate is your general financial health — which could include how much of an emergency fund you have, your retirement savings, and your other assets.
Student loans and the impact on your debt-to-income (DTI) ratio
Lenders want to see whether you can comfortably manage your monthly bills, so your DTI often holds a lot of weight. Your student loans can factor into your DTI, although what lenders are assessing here is your monthly student loan payments, not the overall size of your student loan debt.
Your DTI is the percentage of your gross monthly income that goes toward paying debts. To calculate your DTI, add all your monthly debt payments, such as auto loans, student loans, and monthly credit card payments. Next, divide that total by your gross monthly income. Your gross monthly income is the money you earn before taxes and deductions are taken out. The resulting number from this calculation is your DTI.
The formula is as follows:
(Monthly debts/gross monthly income) x 100 = DTI ratio (percentage)
It’s best to keep your DTI below 36% as a general rule of thumb (including a mortgage), which will allow you to save money for other financial goals. If you’re considering applying for a mortgage and have student loan debt, it’s good to find out early if this would be possible with your current income sources and debt load.
Student loans and the impact on your credit score
Mortgage lenders consider your credit score when making a loan determination, and there’s no question that student loans can impact your credit score.
A quick refresher: Your credit score is usually a three-digit number that rates your credit behavior. Lenders use it as a summary of your credit usage and history, and it helps them determine the amount they can justify lending you and at what interest rate. This is otherwise known as your creditworthiness.
Several factors contribute to your credit score, such as:
- Whether your payments are made on time or you have late payments
- The length of your credit history
- Your credit utilization (how much of your available credit you’re using)
- Your credit mix (the different kinds of credit accounts you have)
Student loans can both positively and negatively impact your credit score. Failure to pay your student loan payments on time can negatively impact your credit score. Even a single missed payment could decrease your credit score, and missed payments can stay on your credit report for up to seven years.
Delinquent or passed due payments for federal student loans typically aren’t reported until the payment is 90 days past due. Most private student loan lenders have different rules for reporting delinquent or past due payments. Defaulting on your student loans can significantly impact your credit score.
On the flip side, staying on top of your student loan payments may help improve your credit score and show that you can make regular payments on your debts. That’s a significant component of your credit score and a sign that you’re a responsible credit user. Student loans could also help your credit score by boosting your average account age and diversifying your account mix.
Now that you know how important your credit score is when securing a mortgage, a useful free tool to consider is Chase Credit Journey®. Enroll in the free tool (you don’t have to be a Chase customer and checking your credit score in the tool won’t impact your credit score) and prioritize building your credit with access to a free credit score, monitoring, alerts, and a personalized action plan provided by Experian™ to help you grow your score. It might be particularly handy when planning for a specific goal (like buying a house) because you can enter the timeframe in which you want to improve your score and receive a personalized action plan. Credit Journey® is based on the VantageScore 3.0, which may be beneficial to use to improve your score over time.
Student loans and the impact on your general financial health
Mortgage lenders use other factors to assess your general financial health and ability to make mortgage payments besides your DTI and credit score.
You’ll often need to provide tax returns and pay stubs or 1099 forms to showcase your employment history and other sources of income.
Your assets, such as savings accounts, money market accounts, and stock portfolios, may also be considered. Lenders will usually be evaluating not only your ability to make mortgage payments but also the amount of money you have to make a downpayment on a home and your general financial reserves (any extra money you might have that could cover your mortgage payments in case you have a temporary loss of income).
While your student loans may not directly impact any of this, having student loans can affect a person’s ability to build up an emergency fund or start investing for retirement, which may impact their overall financial health.
Steps to consider taking if you want to get a mortgage and you have student loans
Student loans generally won’t preclude you from getting approved for a mortgage — for some people, they might even improve their credit score. Still, if you have student loans, there are some steps to consider if you’re weighing applying for a mortgage.
1. Decide if getting a mortgage is the right financial move
Student loans can impact your general financial health, and it’s important to determine if getting a mortgage and buying a home is the right financial move.
Utilize online tools and resources such as the Chase MyHome Affordability Calculator to see how much home you can afford. You can also explore mortgage calculators to help find a mortgage that fits your budget.
You might also want to consider how much you’re currently paying in rent versus how much you’d need to spend to buy a home and what your monthly home payment would look like. Remember, even if you choose not to buy a home now, you might want to pursue it later when your financial situation looks different.
2. Get a financial plan in place to ultimately buy a home
Once you’ve decided that you want to pursue buying a home, a financial plan can be helpful in making the goal a reality. Digital tools can be helpful when it comes to staying consistent as you try to improve your DTI with the end goal of securing a mortgage. Putting together a budget and sticking to it can be helpful when it comes to managing your existing debts and saving for a potential downpayment on a home.
3. Consider adding a co-borrower to your mortgage application
If you’ve determined that pursuing owning a home is the right financial move for you, and student loans seem to be holding you back, consider adding a co-borrower (a spouse, significant other, or parent, for instance) to your mortgage application. Lenders will look at both you and your co-applicant's DTI if you do this, and if your co-applicant's DTI is lower than yours, it can help lower the overall DTI on your loan application, making your application more attractive to lenders.
Applying for a mortgage with a co-borrower who has a higher credit score than you can potentially help you get approved for a mortgage with a lower interest rate and more favorable loan terms, too. Lastly, applying with a co-applicant will mean that the incomes of two people will be considered by the lender, which could help you get approved for a larger loan. Just make sure the co-borrower is a credit-worthy co-applicant, so adding them helps your application rather than hurts it.
4. Get pre-approval for a mortgage
Getting pre-approval for a mortgage can be helpful if you have student loans and are pursuing buying a home. It’s more likely that you’ll ultimately get approved for a mortgage at the amount you are pre-approved for, so you can start home shopping without wasting your time.
While getting pre-approved doesn’t guarantee that you’ll ultimately get approved, it’s usually a pretty good indicator as long as your financial situation isn’t going to change much.
Taking this step can be helpful in other ways, like helping you stand out to sellers and letting you know what budget to stay in when you’re house shopping.
Final thoughts
Your student loans don’t have to hold you back from buying a house. If you’re considering buying a home but are concerned about getting approved for a mortgage, you should talk to a financial advisor or begin conversations with a mortgage advisor.
