Does Student Loan Debt Mean I Can’t Get a Mortgage?

Highlights: 

• Substantial student loan debt can affect your ability to make large purchases and take on other debts, such as a mortgage.
• However, because your payment history is generally important to lenders, making student loan payments on time can actually help your credit scores.
• Although it may be more difficult to obtain a mortgage with student loan debt, it's not impossible.

In recent years, the majority of U.S. college students have graduated with debt, with 62% of students carrying either private or federal student loan debt upon graduation. Graduates owed an average of $28,950 in 2019, the most recent year data was available, according to the Institute for College Access & Success.

Substantial student loan debt often affects your ability to make large purchases and take on other debts, such as a mortgage. If you have significant student loan debt but are looking to take out a mortgage to buy a home, there are additional factors you may have to consider before making that dream a reality.

Below, you can learn about how your credit scores, your debt-to-income ratio and your savings can impact your ability to secure a mortgage while trying to pay down student loan debt.

1. How Can Student Loans Affect Credit Scores?

Credit scores are numbers, usually between 300 and 850, that indicate a person's creditworthiness, or how reliable they have been in paying back lines of credit that have been extended to them. The higher the scores, the better a borrower may appear to potential lenders.

When you apply for a mortgage, your credit scores and accompanying credit reports showing your credit history are among the main information used by lenders to determine whether or not to loan you money.

Even if you have substantial student loan debt, you can still maintain high credit scores as long as you make your payments on time, keep credit card and other debts to a minimum and achieve a good credit mix.

Payment history makes up about 35 percent of your credit scores, so making student loan payments on time can actually help your scores. On the flip side, if you have struggled to pay on time in the past, that history may affect whether or not you get approved for a mortgage.

Having different kinds of credit in your portfolio, known as credit mix, makes up a smaller proportion of your credit scores, but this sort of diversity can still help boost the overall numbers. You may be able to improve your mix by opening a new credit card or other line of credit — just make sure you're able to pay your balance on time. You should also consider the impact that opening new credit accounts can have on your overall credit scores.

You'll also want to keep tabs on your credit reports to ensure that all the information included is accurate and up to date. You can get six free copies of your Equifax credit report each year when you sign up for a myEquifax account. You can also obtain free weekly credit reports from each of the three nationwide consumer reporting agencies — Equifax, Experian and TransUnion — through April 2022 at www.annualcreditreport.com.

2. What's Included in Your Debt-to-Income Ratio for a Mortgage?

Your student loan debt likely has an effect on your debt-to-income ratio (DTI), another number lenders use when determining whether to lend you additional money.

Your DTI is calculated by dividing all your monthly debt payments by your total monthly income. The more debt you have, the higher your DTI and the less likely you are to be approved for a mortgage.

Many lenders prefer your DTI to be below 36 percent, but you may be able to get approved for government-backed mortgages, like those from the Federal Housing Administration, with a DTI of up to 50 percent.

If you're looking to decrease your DTI to qualify for a mortgage, you can either increase your income through a second job or a raise, or focus on lowering your debt. Before applying for a mortgage, try to pay down as much of your existing debt as possible and make sure you don't add to your overall debt.

3. Should You Pay Off Debt or Save for a Down Payment?

The third major area to consider when applying for a mortgage when you have student loan debt is how that debt impacts your overall savings.

When you're in the process of reducing your debt, a portion of your monthly income goes towards paying down your loans, which is money that might otherwise go toward saving for a down payment on a home.

Generally, having about 20 percent of the home's purchase price saved for a down payment helps you get approved for a mortgage. However, there are ways around this, such as turning to the Federal Housing Administration and the U.S. Department of Veterans Affairs for mortgages that require smaller down payments.

Ultimately, it is possible to get a mortgage if you have student loan debt, but it may be harder. Consider the different factors outlined above and evaluate for yourself whether buying a home while still paying down debt is right for you.