When you apply for a mortgage, lenders will evaluate your creditworthiness or ability to make monthly payments by reviewing your credit, income, assets, and existing debt obligations. Having student loans does not automatically prevent you from getting a mortgage, but if lenders consider your student debt a hindrance to making timely mortgage payments, it may result in less favorable terms such as a higher interest rate.

Student Loans Can Make It Harder To Save For A Down Payment

The down payment on a mortgage is the amount of money you pay upfront to purchase a home. The larger the down payment, the smaller the loan amount you will need to borrow from the lender. Student loans can make it harder to save for a down payment on a mortgage as they add to your monthly expenses and can restrict your financial flexibility.

While there are mortgages that offer 100% financing, such as the USDA and VA loans, experts still recommend that you put down money for a down payment. The reason? How much you put down can have a few key effects on a mortgage. This includes the interest rate, the monthly payment amount, your starting home equity, private mortgage insurance (PMI), and your qualification.

Student Loans Can Raise Your DTI Ratio

Your debt-to-income (DTI) ratio is a measure of how much of your income goes toward paying off debt. It is calculated by dividing your total monthly debt payments by your gross monthly income. When it comes to student loans, they are considered a form of debt and will be included in your DTI ratio calculation.

Lenders use your DTI ratio as a way to determine your ability to repay a loan. It is one of the key factors used to evaluate your creditworthiness. A higher DTI ratio may indicate that you have a higher level of debt in relation to your income, which could make it more difficult for you to qualify for a mortgage or other types of loans.

Having student loan debt can affect your DTI ratio, especially if your income is relatively low compared to your student loan payments. The higher your student loan payments are in relation to your income, the higher your DTI ratio will be. However, it’s worth noting that there are some loan programs that have higher DTI ratio limits, and some lenders may be willing to work with you if your DTI ratio is high but you have other compensating factors.

Student Loans Can Lower Your Credit Score

Your credit score, which is a measure of your creditworthiness, is determined by several factors. One of the most important is your credit utilization ratio or the amount of debt you owe, which makes up 30% of your credit score. Student loans, particularly when they are new, can have a negative impact on your credit score.

Mortgage lenders pay a lot of attention to your credit score when considering your application. This is because your credit score reflects your potential risk as a borrower. If your score is too low, you’re seen as someone who’s more likely to default, which can make it harder to get a competitive mortgage.

To qualify for a conventional mortgage, you generally need a credit score of at least 620. For government-backed loans such as FHA, USDA, and VA loans, the minimum credit score requirements are 580, 640, and 620 respectively.

How To Get A Mortgage When You Have Unpaid Student Loans?

Getting a mortgage when you have unpaid student loans can be challenging, but it is still possible. Here are some steps you can take to improve your chances:

• Prioritize paying off your student loans. Lenders look at your debt-to-income ratio (DTI) when evaluating your mortgage application. The lower your DTI, the more favorably they will view your application. Prioritizing paying off your student loans can help lower your DTI and improve your chances of getting approved.
• Improve your credit score. Your credit score is also an important factor in determining your mortgage rate. Improving your credit score by paying bills on time and keeping credit card balances low can help you qualify for a better mortgage rate.
• Increase your down payment. A larger down payment can help you qualify for a lower interest rate, reducing the lender’s risk.
• Look for government-backed loans. Government-backed loans, such as FHA, USDA, and VA loans, may have more lenient requirements for borrowers with unpaid student loans.
• Consult with a mortgage lender. Each lender has its own underwriting guidelines and may have different policies on how they consider unpaid student loans. Consult with a mortgage lender to understand your options and find out what you need to do to qualify for a mortgage.
• Consider loan rehabilitation. If you’re having trouble making payments on your student loans, loan rehabilitation may be an option. It allows you to make reduced payments for a period of time, and after completing it your loans will be reported as current, which can help to improve your credit score.

The Bottom Line

Student loans are an amazing way to finance an education. However, they can impact your ability to achieve future financial goals like getting a mortgage. With that said, it isn’t impossible.

Fortunately, a higher credit score can compensate for outstanding student loan debt. Enter credit restoration, the process of removing negative information from your credit report. Call us at 888-799-7267 to schedule a Free Credit Consultation.