How Student Loans Affect Your Mortgage Approval

Last Updated 4/13/2015

The percentage of Americans with students loans is increasing each year and so is the amount of money they are borrowing. Many young Americans are graduating with five to six figures of student loan debt. The payments on these loans can amount to the equivalent of a mortgage payment. Sadly, these facts are making it much more difficult for graduates with student loan debt to qualify for a mortgage. There are many options for putting student loans on deferment, consolidating payments or having loan balances forgiven through various work programs. However, your student loans will still be considered on your mortgage loan application and may have a bigger effect on your approval than you’d think.

Student Loans & Debt to Income Ratio

The biggest way that student loans affect your mortgage approval is through the debt to income ratio (DTI). A DTI is calculated by dividing the number or monthly credit obligations (including the new mortgage payment) by the total gross monthly income. Most lenders like to see a debt to income ratio of 43% or less. If the DTI is higher than 43% the applicant is considered risky. Student loan payments that amount to several hundred dollars each month will take up a large amount of a debt to income ratio and can jeopardize being approved for a mortgage.

Common Misconceptions About Student Loans & Mortgages:

  • Underwriters regard them differently than other loans.
  • Loans in deferment won’t affect debt to income ratio.
  • Co-signed loans won’t affect debt to income ratio.
  • Loans under forgiveness programs won’t affect debt to income ratio.

There’s a common misconception that student loans are viewed differently on a mortgage application. In reality they are viewed like any other debt on the application. Underwriters are just concerned with how much debt there is and what the payment history has been on the loan.

Many mortgage applicants also feel that their student loan payments won’t be factored into the debt to income ratio for various reasons. If their student loan payments are paid by someone else, are in deferment, or are a part of a student loan forgiveness program, they think the loans won’t affect the mortgage application. This is not true. Lenders will still use student loan payments even if someone else is paying the loan. If that person stops paying on the loan, you are still obligated to make the payments. Additionally, loans that are in deferment at the time of the mortgage application won’t be in deferment forever. Most likely during the 30 years you are paying on your mortgage you will be obligated to repay your student loans. Loans that are in a student loan forgiveness program will also be calculated into the debt to income ratio. These programs usually require a certain time commitment to working in a particular field. If for whatever reason that commitment is not met, the applicants will have to resume making student loan payments. Lenders want to protect themselves from these potential situations from arising and therefore they don’t make many exceptions for student loan payments.

So what options are there for potential homeowners that are saddled with large student loan payments? There are several options a mortgage applicant can take to increase their chances of approval.

  1. Lower their debt to income ratio by paying off other debts.
  2. Reduce their amount of student loan debt.
  3. Consolidate their student loans into a lower monthly payment.
  4. Increase their income.
  5. Reduce the amount of mortgage they are applying for.

Having student loans doesn’t mean you can’t get approved with a mortgage. Applicants must show that they have the income to support paying back their student loans and affording homeownership. Each lender has different guidelines regarding student loan payments. Discuss your unique situation with your lender to see what their regulations are for student loan obligations on a mortgage loan application.