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are student loans factored into mortgage

Last Updated on June 3, 2022 by

The Department of Education has tightened lending standards for its subsidized loans and PLUS loans, which is likely to have an effect on student loan debt. Are student loans factored into the mortgage? Will you be able to get a mortgage with student loans? how will it affect your financial situation? Let’s talk about it. In recent years, more and more Americans have gone back to school in order to gain valuable employment skills that come with a big salary. This has led to a large increase in the amount of student debt being taken out by Americans every year. The question as to whether student loans are factored into your mortgage qualification is a very important one to consider when starting your search for a home loan.

Here are the things we will talk about in today’s article; Are Student Loans Factored Into Mortgage, buying a house with 100k student loans, student loans vs mortgage, buying a house with 200k student loans and other related information.

Does Student Loan Debt Affect Mortgage Applications?

Are Student Loans Factored Into Mortgage

Student loans don’t affect your ability to get a mortgage any differently than other types of debt you may have, including auto loans and credit card debt. When you apply for a mortgage, your lender will assess all of your existing monthly payment obligations, including student loans, to determine whether you would be able to manage the additional monthly payment. Depending on your situation, the lender will decide whether you qualify for the new loan, and if so at what interest rate.

For that reason, you should consider how both your monthly student loan payment and a hypothetical mortgage payment could affect your debt-to-income ratio and overall credit score before you apply for a mortgage. In other words, if you have any existing debt, you need to be careful that you will be able to manage all your monthly payment obligations with your current income.

This calculation varies a bit depending on the type of mortgage loan you choose.

Potential homebuyers can choose between a conventional mortgage from a private lender, like a bank or other financial institution, or an FHA loan, which is a mortgage backed and insured by the Federal Housing Administration for people with limited savings or lower credit scores. This backing enables the lender to offer you a better deal, which typically includes a lower minimum down payment and easier credit qualifying. Recent changes to the way lenders must calculate monthly student loan payments can make the FHA loan a more attractive option for those with student loan debt, particularly first-time homebuyers.

As you consider the options, here are some things you need to know about your debt-to-income ratio and credit score.

buying a house with 100k student loans

What To Know About Getting A Mortgage While You Still Have Student Loan Debt

Do you have a steady job? Do you have a good grasp on your everyday expenses? You might think it’s a good time to buy a home. But wait: Is buying a house a good idea if you still have student loan debt?

Let’s take a look at how student loan debt might affect your ability to get a mortgage. We’ll show you how lenders view this kind of debt and give you some tips to improve your chances of qualifying.

Overview: How To Get A Mortgage

Before we talk about how debt affects your ability to get a mortgage, let’s go over the process you’ll go through to get a loan.

The first step is to get a preapproval. A preapproval letter is a document that indicates you’re a good candidate for a mortgage based on the information you’ve given the lender. Your lender will ask you for some financial documentation and for permission to view your credit report. This will tell the lender about your current student loan balance.

Most preapprovals also include a loan amount that you qualify for and an estimate of what your monthly payment might be. It’s important to get a preapproval because it helps you shop for homes within your budget.

Our Verified Approval Letter can give you the strength of a cash buyer, making your offer more attractive to sellers since we verify your credit, income and asset information upfront.

Underwriters will look at:

  • Your current debt
  • Your credit score
  • Your income
  • Any unusual activity in your recent bank account transactions
  • Other assets you may have

Once all of your documentation is verified and the home appraises at the value necessary, your lender will give you a document called a Closing Disclosure, which includes the final terms of your loan and your closing costs. From here, all you need to do is acknowledge your disclosure, attend a closing meeting and sign on your loan.

How Student Loans Are Viewed By Lenders

You don’t need to be 100% debt-free to buy a home or qualify for a mortgage. However, one of the most important things that lenders look at when they consider you for a loan is your current debt, including any associated with your outstanding student loan balance. Lenders need to know that you have enough money to make your payments after you get your loan. The more debt you have, the more likely you are to fall behind on your payments.

Understanding Debt-To-Income Ratio

Lenders look at a number called your debt-to-income (DTI) ratio when they consider you for a loan. Your DTI ratio describes the percentage of your monthly income that goes toward debt. You may have trouble getting a mortgage if you have a high DTI ratio. Calculating this ratio is simple.

First, add all the monthly payments you make. Only include regular, recurring and required payments in your calculations. Some payments you should include in your DTI calculation include:

  • Your monthly mortgage payment or rent
  • Your homeowners insurance or renters insurance premium
  • Any monthly homeowners association fees you pay on your current property
  • Minimum credit card payments
  • Student loan payments
  • Auto loan payments
  • Personal loan payments
  • Court-ordered back taxes, alimony or child support payments

Leave out expenses that vary from month to month. Some expenses that you shouldn’t include in your DTI ratio calculation include:

  • Entertainment, food and clothing costs
  • Utility bills
  • Transportation costs
  • Savings account contributions
  • 401(k) or IRA account contributions
  • Health insurance expenses

Remember to only include the minimum required payment you need to make each month. If you have $20,000 in student loan debt but you only have a minimum required payment of $100 a month, only include $100 in your DTI ratio calculation.

Add all your monthly recurring expenses, then divide the number you get by your total pre-tax monthly income. Is someone else applying for your mortgage loan with you? If so, include their income in your calculation as well. Multiply the number you get by 100 to get your DTI ratio as a percentage.

DTI Example

Let’s take a look at an example. Imagine that you have a total monthly gross income of $4,000. Say that you have the following monthly debts:

  • Rent: $500
  • Student loan minimum payment: $150
  • Auto loan minimum payment: $250
  • Credit card minimum payment: $100

In this example, you’d first add up all of your debts for a total of $1,000. Then divide $1,000 by your total gross income, $4,000. Your DTI ratio is 0.25, or 25%.

Take a look at how your current student loan debt compares to your overall income. Though the specific DTI ratio you need for a loan depends on your loan type, most lenders like to see DTI ratios of 50% or lower. You may need to work on reducing your debt before you buy a home if your DTI ratio is higher than 50%.

Great news! Rates are still low in 2022.

Missed your chance for historically low mortgage rates in 2021? Act now!

Should You Pay Off Your Student Loans Before Buying A House?

So, should you pay off your student loans before you buy a home? First, take a look at your DTI ratio. Lenders care less about the dollar amount of debt that you have and more about how that debt compares to your total income. You can still buy a home with student debt if you have a solid, reliable income and a handle on your payments. However, unreliable income or payments may make up a large amount of your total monthly budget, and you might have trouble finding a loan. Focus on paying down your loans before you buy a home if your DTI is more than 50%.

Look at other areas of your finances before you consider homeownership. You may want to hold off until you build up some savings if you have a reasonable DTI ratio but you don’t have an emergency fund. In the same vein, if your student loan payment is standing in the way of retirement contributions, wait to buy a home until you pay down more of your debt. Also bear in mind that most mortgages require a down payment when you purchase a home. This lump sum should also be considered in the overall total as well.

Finally, look at your interest rate. If you have a high interest rate on your student loans, your loans will cost more over time. Paying down more of your higher-interest loans before you invest in a home allows you to reduce what you pay in interest. Also, take a look at your repayment plan and compare your monthly payments to your accruing interest. If your payments are low but you aren’t paying off enough to cover your accruing interest every month, you’re actually going deeper into debt. In this situation, you should pay more than your minimum and focus on paying off your loans first before you take on more debt with a mortgage.

However, now is likely a good time to buy a home if you have an emergency fund, your DTI is low, or you’re contributing to your retirement and you’re on a solid student loan repayment plan.

Qualifying For A Mortgage And Buying A House With Student Loans

Set on buying a home even though you have student loans? Here are a few steps that you can take to improve your chances of qualifying.

Consider All Home Loan Types

You may not qualify for a conventional loan if you have a DTI ratio that’s higher than 50%. A conventional loan is a mortgage that follows guidelines set by Fannie Mae and Freddie Mac, which standardize mortgage lending in the U.S. However, you may still be able to buy a home with a government-backed loan. These loans are insured by the federal government, making them less risky for a loss from a default. This allows mortgage lenders to issue loans to borrowers with higher DTI ratios.

You could consider an FHA loan, which is backed by the Federal Housing Administration. The maximum DTI ratio for an FHA loan is 57% in many cases. On the other hand, if you’ve served in the armed forces or National Guard, you might qualify for a VA loan. You can buy a home with a DTI ratio of up to 60% with a VA loan. Make sure you meet service requirements before you apply for a VA loan.

Pay Off Another Debt

The fastest way to lower your DTI ratio is to pay down some of your debt. Paying off debt eliminates a recurring expense and frees up more cash flow. Consider paying off another debt source if you can’t afford to make an extra payment on your student loans. For example, you’ll instantly see your DTI ratio fall if you have credit card debt and can pay it off in full.

Increase Your Income

You can also lower your DTI ratio by increasing your income. Pick up a few more hours at work or take on a side hustle so you get the cash injection you need. Keep in mind that you’ll need to prove that this extra income is regular and recurring for it to count toward your DTI ratio. Most lenders want to see at least a 2-year history for all of your income sources.

The Bottom Line: Can You Buy A House With Student Loans?

You don’t need to be debt-free to buy a home, but you may have trouble getting a loan if you have too much debt. Calculate your DTI ratio and compare your monthly debts to your gross income. Pay down more of your debt before you buy a home if your DTI ratio is higher than 50%.

Additionally, make sure your financial situation is stable before you invest in a home. You might want to be sure you’re on a solid repayment plan, have funds for a down payment (plus an emergency fund) and are contributing toward retirement before you shop for a loan.

As you begin your home buying journey, it can also be worthwhile to consider looking into getting preapproved by a mortgage lender. Preapproval is a great first step for student debt holders deciding on what type of loan can fit their budget. Get preapproved with Rocket Mortgage today.

student loans vs mortgage

Student Loan Debt vs Other Debts

Last Updated: October 12, 2021 Cite this WebpageBy Melanie HansonFact Checked

Report Highlights. Student loan debt makes up the 2nd largest amount of debt in the nation behind mortgages.

  • Student loan debt in America has increased by $165.9 billion since last year.
  • Mortgages in the U.S. have increased by $703 billion since last year.
  • Auto loan debt in America has increased by $80 billion since last year.
  • Credit card debt in the U.S. has fallen by $73 billion since last year.
National debt makeup on Education Data Initiative

Student Loan Debt vs Mortgage Debt

Student loans account for 11% of total national debt while mortgages account for most of the national debt at 69%. Mortgages dwarf student loans in size on the individual, state, and national scale. The repayment terms of a mortgage are also lengthier than the average student loan.

  • The national student loan debt is $1.71 trillion.
  • Nationally, mortgage represents $10.05 trillion of all debt.
  • The national mortgage is approximately 6.5 times larger than the student loan debt.

Repayment Terms

A significant reason mortgages account for the majority of the national debt is because of the extended length of their repayment period. In a typical fixed-rate mortgage, payments are determined by the loan amount, the loan term, and the interest rate. Student loans are considered on a similar basis.

  • Typical standard repayment plans for federal student loans and private student loans take a total of 10 years to pay off.
  • Mortgages typically come in 15 to 30-year fixed-rate loans.
  • For mortgages, the 30-year option tends to be the most popular.
  • The average student loan debt is $39,351.
  • The average mortgage is $176,700.
  • The average mortgage is nearly 4.5 times larger than the average student loan debt.
  • On average, the terms of a mortgage lasts 27 years.
  • The typical monthly payment of a mortgage is $1,487.
  • The typical monthly payment on a student loan is between $200 and $299.
Mortgage and Student Loan Repayment Timeline on Education Data Initiative

State Comparisons

In the American Housing Survey, the Census Bureau measured the mortgage characteristics of the average U.S. Home. The table below compares a state’s average student loan debt with its average mortgage. Only 12 states had their average mortgage available.

  • California’s average mortgage is $140,900 more than the national average.
  • California’s average mortgage is nearly 9 times larger than its average student loan.
  • Ohio has the lowest average mortgage at $113,500.
  • Texas has the lowest average student loan debt at $32,800.
  • Ohio’s mortgage is nearly 3.5 times larger than Texas’ student loan.
StateStudent Loan DebtMortgage
California$36,400$317,600
Colorado$35,800$237,900
Florida$39,700$158,800
Illinois$37,600$154,100
Massachusetts$34,100$239,800
Michigan$35,900$121,076
New Jersey$35,100$241,772
New York$37,800$180,900
Ohio$34,600$113,500
Pennsylvania$35,400$133,900
Texas$32,800$148,700
Virginia$39,000$245,054

Student Loan Debt vs Auto Loan Debt

Auto loans make up the 3rd largest form of the national debt, directly behind student loan debts. Auto loans tend to have higher fixed interest rates than federally backed student loans. Because federal student loans offer flexibility and loan forgiveness, it is suggested individuals pay off their auto loans first.

  • Student loans make up $1.71 trillion of the total national debt.
  • Auto loans at $1.37 trillion make up 9% of the national debt.
  • The national student loan debt is $340 billion more than the auto loan debt.

Repayment Terms

Monthly car payments are determined by the individual’s credit score along with other variables. The major difference between auto loans and student loans is in the use of credit scores. Student loans backed by the government do not take credit scores into account.

  • The average auto loan is $19,865.
  • The average student loan debt is $39,351.
  • The average student loan debt is $19,486 larger than the average individual auto loan.
  • The typical monthly payment for a new car is $554.
  • The typical monthly payment for a used car is $391.
  • The typical monthly payment on a student loan is between $200 and $299.
Auto and Student Loan Repayment Timeline on Education Data Initiative

State Comparisons

The average auto loan increased in all 50 states from 2019 to 2020. Despite the disruption in travel due to Covid-19 the average auto debt still increased over the year. Student loan debt increased in the states from 2019 to 2020 despite the federal suspension on payments.

  • Rhode Island has the lowest average auto loan debt at $15,485.
  • Wyoming has the highest average auto loan debt at $25,522.
  • The District of Columbia’s student loan debt is $37,991 more than its auto loan debt.
StateStudent Loan DebtAuto Loan Debt
Alabama$37,100$21,655
Alaska$33,500$23,158
Arizona$34,100$21,945
Arkansas$33,300$23,193
California$36,400$19,713
Colorado$35,800$20,731
Connecticut$34,900$16,212
Delaware$37,000$19,309
District of Columbia$55,400$17,409
Florida$39,700$20,110
Georgia$41,500$21,696
Hawaii$36,500$19,815
Idaho$32,600$20,937
Illinois$37,600$19,036
Indiana$32,800$18,698
Iowa$30,500$19,864
Kansas$32,500$20,181
Kentucky$32,500$19,336
Louisiana$34,400$23,733
Maine$32,500$17,696
Maryland$42,700$20,195
Massachusetts$34,100$15,887
Michigan$35,900$15,638
Minnesota$33,400$18,049
Mississippi$36,700$21,915
Missouri$35,400$19,459
Montana$33,300$21,135
Nebraska$32,100$18,951
Nevada$33,600$21,727
New Hampshire$33,600$17,654
New Jersey$35,100$16,286
New Mexico$33,600$23,772
New York$37,800$16,483
North Carolina$37,500$20,121
North Dakota$29,200$21,834
Ohio$34,600$17,409
Oklahoma$31,500$23,302
Oregon$36,900$19,096
Pennsylvania$35,400$17,600
Rhode Island$31,800$15,485
South Carolina$38,300$19,996
South Dakota$31,100$19,890
Tennessee$36,200$21,077
Texas$32,800$24,821
Utah$32,200$20,346
Vermont$36,700$17,879
Virginia$39,000$20,013
Washington$35,000$20,649
West Virginia$31,800$22,553
Wisconsin$31,800$17,661
Wyoming$31,000$25,522

Student Loan Debt vs Credit Card Debt

The overall national credit card debt dropped in 2020. In contrast, student loan debt rose in the same year. The average student loan debt may be much higher, yet the monthly payments for both debts are nearly the same.

  • Student loans make up $1.71 trillion of the total national debt.
  • Credit Card debt at $820 billion makes up 5% of the national debt.
  • The national student loan debt is $890 billion more than the credit card debt.

Repayment Terms

Experts suggest paying off credit card debt first because of the higher interest rate on credit cards. Credit card debts do not offer repayment plans based on income, ability to pay, financial payments, or deferred payments, unlike student loans.

  • The average credit card debt per household is $5,315.
  • The average student loan debt is $39,351.
  • The average student loan is nearly 7.5 times larger than the average credit card debt.
  • Credit cards can often carry an interest rate of over 20%.
  • Federal student loans usually have an interest rate below 10%.
  • The typical monthly payment on a student loan is between $200 and $299.
  • Payment on average for the monthly credit card bill is $244.
Credit Card Student Loan Repayment Timeline on Education Data Initiative

State Comparisons

The states with the highest average credit card debt in 2019 saw the greatest decreases in 2020. In contrast, average student loan debts increased across all 50 states.

  • While not a state, Washington D.C. saw credit debt shrink by 20% in the past year.
  • In Washington D.C., student loan debt is $49,729 more than credit card debt.
  • Alaska had the highest increase in student loan debt at 14%.
  • Alaska has the highest average credit card debt at $6,617.
  • Iowa has the lowest average credit card debt at $4,289.
StateStudent Loan DebtCredit Card Debt
Alabama$37,100$5,047
Alaska$33,500$6,617
Arizona$34,100$5,157
Arkansas$33,300$4,791
California$36,400$5,120
Colorado$35,800$5,541
Connecticut$34,900$6,040
Delaware$37,000$5,462
District of Columbia$55,400$5,671
Florida$39,700$5,623
Georgia$41,500$5,693
Hawaii$36,500$5,614
Idaho$32,600$4,582
Illinois$37,600$5,365
Indiana$32,800$4,651
Iowa$30,500$4,289
Kansas$32,500$5,063
Kentucky$32,500$4,521
Louisiana$34,400$5,127
Maine$32,500$4,676
Maryland$42,700$5,977
Massachusetts$34,100$5,141
Michigan$35,900$4,692
Minnesota$33,400$4,767
Mississippi$36,700$4,587
Missouri$35,400$4,950
Montana$33,300$4,785
Nebraska$32,100$4,819
Nevada$33,600$5,422
New Hampshire$33,600$5,327
New Jersey$35,100$5,978
New Mexico$33,600$4,948
New York$37,800$5,414
North Carolina$37,500$5,121
North Dakota$29,200$4,865
Ohio$34,600$4,888
Oklahoma$31,500$5,271
Oregon$36,900$4,681
Pennsylvania$35,400$5,090
Rhode Island$31,800$5,256
South Carolina$38,300$5,310
South Dakota$31,100$4,633
Tennessee$36,200$5,006
Texas$32,800$5,848
Utah$32,200$4,900
Vermont$36,700$4,653
Virginia$39,000$5,992
Washington$35,000$5,238
West Virginia$31,800$4,686
Wisconsin$31,800$4,376
Wyoming$31,000$5,182

Student Loan Debt vs Other Assorted Debts

The remaining 6% of the national debt is made up of a compilation of sources. There is some overlap in these debts with other debts. For example, an individual may pay off their medical debt using a credit card.

  • The median amount of medical debt from 2017 was $2,000.
  • Revolving debts are roughly $1 trillion of the national debt.
  • If all U.S. citizens had revolving debt, it would be $3,299 per person.

Sources

  1. Federal Reserve Bank of New York, Center for Microeconomic Data: Household Debt and Credit Report
  2. The Federal Reserve (The Fed): Report on the Economic Well-Being of U.S. Households in 2019 – May 2020
  3. Debt.org: Key Figures Behind America’s Consumer Debt
  4. Consumer Financial Protection Bureau (cfpb): How long does it take to pay off a student loan?
  5. Educationdata.org: Student Loan Debt by State
  6. United States Census Bureau, Who Had Medical Debt in the United States?: 19% of U.S. Households Could Not Afford to Pay for Medical Care Right Away
  7. Experian: U.S. Auto Debt Grows to Record High Despite Pandemic
  8. Northwestern University, Financial Wellness: Credit Cards vs. Student Loans 

buying a house with 200k student loans