Wasn’t college graduation exciting? You’d finally reached the end. Classes, dorm rooms, and long nights of studying were behind you! But if you’re like most college graduates, your student loans followed you right out of college and into the real world. If you’ve worried that student loans might keep you from buying a home, you can stop stressing. You can qualify for a mortgage with student loans, and it’s becoming even easier.
How Student Loans Affect Mortgages
When you apply for a mortgage your loan officer looks at your debt-to-income ratio, which compares your monthly debts to your monthly income. The monthly payments on your student loans are included in that ratio, which is where the problem typically occurs. By adding student loan payments on top of your other debts, your debt-to-income ratio can quickly rise above the qualifying limits set by mortgage lenders.
Student Loans and Conventional Mortgages
When you’ve got student loans, a conventional mortgage backed by Fannie Mae is a great home loan option. They offer the following benefits that can help you buy your dream home, even with student loans.
1. Positive Changes in Calculating Your Monthly Payment
Recently Fannie Mae made a change in the way lenders calculate your monthly student loan payments. Previously a mortgage lender calculated the monthly payment on your student loans by taking 1% of your overall loan balance. So if your balance was $80,000, then your monthly payment would be $800.
Now lenders can consider your actually payment, as reported to the credit bureaus, under a federal reduced-payment plan. So if you’re paying $250 towards your student loans each month, that’s the amount that would be added to your debt-to-income ratio. That $550 difference could easily lower your debt-to-income ratio to within the mortgage lender’s acceptable range, helping you qualify for a mortgage.
2. High Debt-to-Income Limits
Conventional home loans also offer generous debt-to-income limits, but in 2017 Fannie Mae made a big improvement. They increased their debt-to-income limit from 45% to 50%. That 5% increase can go a long way in helping you qualify for a mortgage with student loans. You could have an additional $200 in monthly debt and still qualify for a $200,000 home loan backed by Fannie Mae because of the increase.
Note: There are other home loan programs that work well with student loans. If you’d like to learn more about these programs, please give us a call at 435-755-2177.
Improving Your Chances of Qualifying for a Mortgage with Student Loans
Here are a few things you can do to improve your chances of getting a mortgage with student loans. These ideas won’t guarantee that you’ll get approved, buy they can definitely help.
1. Increase Your Credit Scores
When you increase your credit scores it shows mortgage lenders that you can successfully pay off debts you owe. This gives you a better chance of getting approved because the lender views you as less likely to default on your mortgage.
2. Pay off Smaller Debts - Lowering Your Debt-to-Income Ratio
Paying off smaller debts, like credit card bills, increases your chance of getting approved because it lowers your monthly debt obligations. This helps offset the increase in your debt-to-income ratio caused by your student loan payments.
3. Save for a Down Payment
A down payment helps in two ways. First it can lower the monthly payment on your new home, which will also help decrease the debt-to-income ratio that we mentioned earlier. Second, if you have a big enough down payment, you can *avoid mortgage insurance and lower your payment even further.
Note: Even with student loans, you can qualify for a mortgage without a down payment. Saving for a down payment can simply increase your chances of being approved.
*Avoiding mortgage insurance requires a 20% down payment on a conventional home loan.
20% down payment, 30 year fixed rate mortgage, 4.043% annual percentage rate (as of 10/24/17)
Do You Qualify?
One of the best ways to see if you qualify for a mortgage with student loans is to get a free pre-approval. One of our loan officers can show you what mortgage options are available for your current situation and answer any questions you have about buying a home.