May 17, 2016 at11:20 am

How to Buy a Home When You’re Saddled With Student Loan Debt


Warren Christopher Freiberg

6:00 am ET
May 12, 2016


Education is supposed to be your stepping stone to a financially secure future, right? But recent years have seen a perfect storm of ever-rising tuition rates and weak employment, leaving many recent grads saddled with thousands of dollars in student debt and with no job in sight. Bummer.

This helps explain why so many young people are feeling The Bern. As in Bernie Sanders. The rumpled, 74-year-old senator from Vermont is snagging a big chunk of the youth vote by promising to somehow deliver free college educations to all Americans. No strings. And no debt. Who knows if it’s even remotely possible? But for some, that’s one heck of a seductive idea.

I’ve sure seen what a difference student loan debt can make. I live it. As a recent law school grad, I have about $175,000 in unpaid student loans, which accrue more interest with each passing day. Yes, I know that a law degree will ultimately be easier (and therefore, faster) to pay off than most bachelor’s or even master’s degrees. But I’m definitely not raking in the big bucks yet—most attorneys aren’t making anywhere close to six figures, especially right out of law school and not in the current oversaturated legal job market.

So I’ll count myself among the more than 50% of student loan borrowers who say their debt affects whether or not they’ll pursue homeownership, according to a 2015 survey by American Student Assistance, a Boston-based nonprofit. And while a 22-year-old new college grad might not be that concerned with buying a home, at 32, I feel like I should be starting my adult life—and that means buying a home.

“I’d say student loan debt is probably the biggest concern people have about getting qualified,” says Dan O’Brien, a Realtor® in Indianapolis, IN. “I’ve had many buyers tell me they want to buy a house but they have a ton of student debt and don’t think they make enough to qualify because of it.”

So should you just give up on buying a home until that far-off day when you’ve paid back all your loans? Not necessarily. Let me give you some (free!) education about what I’ve learned in exploring my options for homeownership—debt and all.

Get your student loan payment plan in order

I started calling lenders shortly after I graduated. Do you want to absolutely kill a conversation with a mortgage lender? Tell them you’re not paying anything on your student loans right now and you don’t know how much you’ll be able to pay in the future. Hello? Hello?

I didn’t realize it at the time, but I was looking to purchase a home during the absolute worst point in a student loan repayment plan—the six-month grace period after graduation. I hadn’t paid anything back yet, or set up an income-based repayment plan. I just had many thousands of dollars in debt hovering over me, scaring off potential lenders.

“It used to be that certain programs would show you were in deferment [to put off paying your debt], and the underwriter would overlook that,” says Travis Cartmel, a branch manager at mortgage company AnnieMac in Indianapolis. This is known as The Good Old Days.

But under current guidelines, even if you’ve deferred your loan repayment, mortgage lenders will still factor in the amount you owe. And they could deny you because of it—no matter how good your credit score is.

So don’t do what I did. Instead, try the following:

  • Wait until the six-month grace period has passed
  • Consolidate your student loans before looking for a mortgage
  • Calculate what kind of mortgage you could afford on top of your student loans
  • Set up an income-based repayment plan, or at least a plan that won’t eat up a huge chunk of your income

While you’re waiting, get all your bills in order

The grace period can be the perfect time to work on paying down credit cards and other bills.

When you apply for a home loan, lenders put a lot of emphasis on your monthly debt-to-income ratio. This must be below 43% to qualify for most mortgages, although keeping it below 36% is ideal to make sure you can keep up with all your monthly bills—and to get the best terms on a loan.

Even if you have a boatful of student loan debt, paying down other bills can significantly lower that debt-to-income ratio. And that’ll also have the bonus effect of improving your credit score, making you all the more attractive (or at least viable) to lenders.

Find a co-borrower, or save up for a hefty down payment

If you have someone else who can make your finances look better on paper, by all means take advantage of it.

Me? I’m not so lucky. My girlfriend’s salary as a medical assistant sadly does not qualify her as a “sugar mama.” And although my actual mom was willing to put money toward a down payment, she didn’t want to co-sign a mortgage.

That down payment is key, though. Even with student loans, most lenders want to see 20% of the purchase price upfront. Some are willing to work with less if you pay extra in private mortgage insurance each month to reach that magical 20% equity. The average millennial home buyer in 2015 could put only 7% down, but if you can do at least 10%, you’ll get a better rate.

And remember, it’s not just the down payment money you need to have upfront—you’ll also have to pay closing costs, covering necessary things like a home inspection, lender fees, and title insurance.

Try the FHA

For people with major student loan debt, Cartmel recommends an FHA loan, which allows for a higher debt-to-income ratio.

“Getting a mortgage with more than $100,000 in student loans can be a challenge, but the FHA can be a huge help,” he says.

But here’s the catch: If you’re paying too little in student loans, it can actually hurt your chances at getting approved for an FHA loan.

The FHA recently changed its rules so that even if you’ve deferred your student loans over the past 12 months and are paying nothing, the FHA looks at your total outstanding student loan balance and figures that you’re paying 2% toward it each month.

So if you have $100,000 in loans, the FHA assumes you have a $2,000 monthly student loan payment, which puts a mortgage way out of reach for most people.

But the good news (and by this point you must have known that there would be some good news) is that once you’re paying anything as part of an income-based repayment plan, the FHA uses this amount to determine whether you qualify for a mortgage.

So here’s the cheat sheet:

  • FHA loans are great if you’re paying a reasonable amount on your student loans
  • But FHA loans are a bad idea if you have a high monthly student loan payment
  • And FHA loans are almost impossible to qualify for if you have lots of student loans and no monthly payment because of a deferral

In the meantime, my girlfriend and I have resigned ourselves to renting for at least another year. It’s not quite what I had in mind when I became an attorney, but we did find a really nice one-bedroom in a lovely Chicago suburb. And we’re slowly managing our finances in order to make a successful run at homeownership soon. Like the rest of the adults.