How to Buy a House While Paying Off Student Loans

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Millennials have been the generation with the most home buyers since 2014, followed by Gen X. As of 2021, Gen X has been the generation with the most student loan debt, followed by Millennials. Many people sitting on the home buying sideline might think that they can’t purchase a home because of their student debt. However, the two generations with the most debt are also the two generations that purchase the most homes. While having student loans might make the home buying process slightly more challenging, it certainly shouldn’t prevent you from applying. By taking some of the following steps, you can increase your chances of mortgage approval and better prepare for your home purchase.

Step 1: Lower your debt-to-income (DTI) ratio

You won’t automatically get denied a mortgage just because you have student loans. But your student loans do contribute to your DTI, which affects your eligibility for different mortgage loans. To calculate your DTI, divide your total monthly debt by your gross monthly income. The lower your DTI, the better.

If you’re already paying student loans, then it’s likely your DTI might be a little higher to start out. Luckily, there are several ways you can lower your DTI before applying for a mortgage.

  • Pay down your debt as much as possible
  • Increase your income
  • Refinance and consolidate your student loans
  • Avoid big purchases

Step 2: Boost your credit score

Your credit score is another big factor that lenders consider when you apply for a mortgage. The higher your credit score, the better. Lenders want to make sure that borrowers will be able to make their monthly mortgage payments on time and in full.

A few simple ways to boost your credit score include:

  • Lower your credit utilization rate
  • Pay your bills on time
  • Keep accounts open
  • Avoid new lines of credit
  • Leave old debts on your report

Step 3: Get preapproved

Before you start your home search, get preapproved for your mortgage. Getting preapproved is easy and it can give you a better idea of how much home you can afford. Plus, it shows sellers that you are serious about buying, which can give you an edge on your competition. To apply for preapproval, you will need to provide information on your:

  • Income
  • Employment
  • Past debts
  • Past residences
  • Credit
  • W-2 forms
  • Tax returns

You can start your preapproval online or by contacting us.

Step 4: Explore down payment assistance options

Paying off student loans might make it harder to save for a down payment on a home. If this is the case, consider exploring our down payment assistance programs. There are several programs that can help ease the costs of a down payment and closing costs, and some that even pay for it altogether. Different down payment assistance programs vary per state, so talk to us about the options in your area.

Down payment assistance programs typically come in one of four forms:

  • A down payment grant
  • Forgivable second mortgage
  • Traditional second mortgage
  • Matched savings programs

Another option is HomeFundIt – a gifting platform that makes it easy for friends and family members to contribute to your down payment goal.

Step 5: Investigate first-time home buyer programs

In addition to down payment assistance programs, there are also several first-time home buyer programs that can help ease the costs of homeownership. Some offer lower interest rates, and some have lower down payment requirements. There are some first-time home buyer programs that vary per state and other that are federal options. To view a list of different loan programs in your state, visit HUD.gov.

Step 6: Consider finding a co-borrower

Many home buyers co-sign a mortgage with their partners. But even if you don’t have a partner, you can still ask close friends or family members if they would be interested in co-borrowing. Rent prices have been soaring over the past few years and paying rent doesn’t contribute to equity or help you build wealth. Benefits of co-borrowing include:

  • Two incomes and credit profiles to help the application – which could mean qualifying for a higher loan balance and lower interest rate.
  • Combining financial forces to make a bigger down payment – which also could lower your interest rate and mortgage payments.
  • Splitting the cost of mortgage payments – saving more money for other expenses.

Thousands of people paying off student loans become homeowners every year. Getting a mortgage with student loans is far from impossible. If you’re sitting on the sidelines of homeownership because of student loans, we would be happy to help you explore your options and make a strong application plan.

Sources: BankrateEducation DataNAR

For more helpful information from our partners at NextMortgage, check out their blog!

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