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How to buy a home when you have student loans


There is a certain “readiness” that comes in owning a home and age or status does not limit this. While an existing student loan can pose a challenge in applying for a mortgage, it is not much different from having other types of loan such as auto loan or credit card debt.

It might pose additional requirements and extra effort, but you can certainly secure a home loan even with student debt! Wondering how to buy a home when you still have a student loan? It starts with carefully organizing your financial capacities and inspecting available options from lenders.

  1. Improve credit score
  2. Much like the standard process in applying for any new loan, a good credit score increases the chances of mortgage approval. As long as you are consistent in your payments, an outstanding student loan will not pull down your credit score. Old accounts with good standing can earn homebuyer points as well, as this includes historical data on their finances.

  3. Decrease Debt-to-Income (DTI) ratio
  4. Lenders use the DTI ratio to determine the capacity of the buyer to pay their monthly dues. A higher DTI makes for an unattractive application. The ideal ratio is 36%, and most banks will not approve a loan if an applicant’s DTI is more than 43%. Many lenders also follow the 28/36 rule, which means that no more than 28% of your gross monthly income should be allocated to your housing expenses and no more than 36% should be spent on all expenses, including your new mortgage.

    Some payments included in the DTI calculation are:

    • Monthly mortgage payment or rent
    • Student loan payments
    • Auto loan payments
    • Credit card payments
    • Court-ordered back taxes
    • Alimony or child support

    You may improve your DTI by reducing your debts and expenses. Consider decreasing your monthly payment on your student loan by enrolling in an income-based repayment program or student loan refinancing or consolidation.

    Conversely you may also improve your DTI by improving your cash flow. Some ways to generate more income include taking in more clients, starting a side hustle, applying for a second job, or requesting for a raise at work.

  5. Get pre-approved
  6. A mortgage pre-approval will give you an idea of the home loan amount you’re likely qualified for while paying off your student debt. This can help you see how much home you can afford and provide an overview of the associated costs and expenses in purchasing a house.

    Some of the required documents for pre-approval include W-2s and tax returns from the last two years, pay stub for a month’s work, and bank statements for two months. The lender will also look at your employment and credit history. For young applicants, a two-year employment history is recommended. Gifts can also be considered a source of income, but it should come with a lender’s gift letter and ideally must be from close kin.

Should you first pay off your student loan before applying for a mortgage?

It varies from case to case. Lenders are not focused on an applicant’s current debts but on their capacity to handle the additional payments. By demonstrating a reliable income and an excellent financial management history, buying a house even with a student loan should not be a problem.

Ready to purchase your new home in California? Contact Yoshikane-Toyama Real Estate Group for expert advice! You can reach them at 714.501.7132, or email them here

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