Homebuyers

How Homebuyers May Qualify for a Mortgage with Student Loan Debt

College may come with a lot of perks, but the student loan debt many graduates leave with is certainly not one of them.

The average federal student loan balance is $38,375 in 2024, according to the Education Data Initiative. When adding in private loans, the debt may go up to an average $41,618, according to the Initiative. Student loans are now the second-highest consumer debt category after mortgages.

All that debt can make it difficult for many to save up for a down payment when they want to buy a home. But it doesn’t mean that qualifying for a mortgage with student debt is an impossible task.

“Borrowers with six-figure debt get approved every day by keeping their debt-to-income low, building good credit, and planning,” said Andrew Latham, a certified financial planner and content director with SuperMoney. The company compares different financial products and services.

Here’s what to know about getting a mortgage with student loan debt.

Homebuyers should pay down student debt if they can

One of the best things homebuyers with student loan debt can do is pay off what they can. This can be hard when rents are high and the prices of everyday goods seem to keep rising.

Focus on reducing debt in the six-to-12 months leading up to a home purchase by cutting back where you can, working extra hours, or getting a side hustle. This may help you to make extra loan payments or pay off smaller loans in full.

It’s often a better idea to pay off smaller loans, even if they’re not student loans, to reduce your debt-to-income (DTI) ratio. Lenders look at your DTI, which is how much you owe compared to how much you earn, when deciding whether to give you a loan.

Explore student loan repayment plans

It’s important to remember that your DTI ratio often matters more than the total amount of student loans you have.

To reduce your monthly debt payments, consider looking at different repayment plans, especially income-driven ones.

“It’s not about whether you have student loans,” said Latham. “It’s about showing you can manage your finances.”

Lenders may look favorably at the extra money you have in your accounts every month when you’re applying for a loan.

Graduated or extended student loan repayment plans can also reduce your monthly payments.

“The lower monthly payment helps your DTI, even if your total loan balance is high,” said Latham.

Look into student loan forgiveness options

If your student loans are eligible for forgiveness, you may be in luck. Some lenders exclude loans that will be forgiven, canceled, or repaid by an employer from your DTI ratio.

Look into whether your employer offers this. It’s most common for those working for the state or federal government, or for those who went back to school through an employer-sponsored plan.

Improve your credit score

Your debt isn’t the only thing lenders consider when applying for a mortgage.

“Your credit score also matters,” said Latham. “Pay all bills on time and avoid new debt before applying.”

These steps can help to improve your credit score. You can also keep your credit utilization under 30% and avoid any unnecessary hard credit checks from banks or lenders.

However, if your credit is quite low, it may be worth it to apply for a secured credit card to boost your credit and get your finances back on track.

Consider more affordable homes

You’re more likely to get approved for a mortgage if you’ll have a lower monthly payment thanks to a lower-cost home. Consider spending less on a home by looking for one that’s a bit of a fixer-upper or is in less of a prime location.

A higher down payment can be to your advantage too, as it reduces the amount of debt you’ll need to take on in a mortgage.

Buyers may want to look into down payment assistance programs. The funding may help contribute to or even cover their down payment and closing costs.

“A solid down payment (even 10%) can strengthen your application and reduce or eliminate private mortgage insurance,” he said.

Homebuyers with student loan debt should talk to a loan officer

One of the best things homebuyers with student loan debt can do is speak with a loan officer early in their homebuying journey.

A loan officer may be able to let you know about financing options that are made for those with a high DTI ratio.

Take some time to meet with one to explore your options, discuss strategies for reducing debt, and plan for next steps.