Will My Student Loan Debt Impact Our Ability to Finance a Home?

Student loan debt is incredibly commonplace. Many adults are saddled with these debts for years, if not decades, representing a significant burden on their financial lives.

However, student loan debt doesn’t stop people from dreaming about being homeowners. But some hesitate to buy a home, fearing their student loans will make it impossible to secure a mortgage.

While student loan debt doesn’t automatically disqualify you from buying a house, it does complicate things. If you are wondering whether your student loans will impact your ability to finance a home, here’s what you need to know.

Student Loan Debt and Debt-to-Income Ratios

Most mortgage lenders evaluate a person’s debt-to-income ratio before approving a loan. This figure, a calculation that compares your monthly debt payments to your gross monthly income, lets them determine how much you can reasonably afford, factoring in your current debt load.

With monthly payments that are usually hundreds of dollars, student loan debt can dramatically impact debt-to-income ratios. This ultimately makes it harder to get financing.

Credit Score Implications

Aside from impacting your debt-to-income ratio, student loan debt also affects your credit score. The time since you last opened any form of credit can positively or negatively affect your score, regardless of whether it was a student loan. The average age of your credit lines may also shift, potentially moving your score up and down.

One of the biggest factors used in generating your credit score is your payment history. If you make timely student loan debt payments, your score can rise over time. Plus, if you miss a payment or become delinquent, your score can plummet.

Since mortgage lenders use your credit score to determine your creditworthiness, how you manage your student loans can easily impact your ability to finance a home.

Luckily, deferment and forbearance don’t inherently hurt your credit score. But, since your balances aren’t shrinking, or may be growing, that can potentially harm your chances of landing a mortgage.

Gathering a Down Payment

While there isn’t a direct correlation, your student loan debt can make it harder to accumulate a down payment. If you’re struggling to pay your loans, saving in general may be challenging. And, since other priorities, like emergency funds and retirement, should take precedence, there might not be much left for other savings.

Sure, there are mortgages that don’t require large down payments, but those can come with some other burdens. For example, you might have to add private mortgage insurance (PMI) to your regular mortgage payment if you can’t put 20 percent down. Exactly how much that costs will vary, but the sum can be substantial.

Ultimately, student loan debt does impact your ability to finance a home. However, it doesn’t mean you won’t qualify.

As with every financing decision, you need to determine whether you can actually afford the mortgage first. You also want a down payment that covers at least 20 percent of the purchase price. Not only can that make the payments more manageable, but it also helps you to avoid PMI.

Buying a home is a big decision, regardless of whether you have student loans. So, don’t jump into anything you can’t afford. Otherwise, you may run into trouble sooner rather than later.

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