Millennials with Student Loans Can Still Buy Homes
There’s a trend affecting how (and if) millennials become homeowners:
As of 2023, it's estimated that U.S. student loan debt is about $1.78 trillion (yes, with a t)—this figure is also on an upward trajectory with no end in sight.
Instead of jumping into marriage, starting families, and settling into homeownership, millennials tend to hold off on the decisions that some of their parents and grandparents made early in life.
Why?
How Do Student Loans Affect Buying a House
For many, student loans are a huge debt that can take decades to pay off. This is one of the biggest challenges millennials face today when considering buying a home. The cost of tuition at universities across the country continues to rise as does the cost of living.
Not to mention... Many millennials prefer to spend money on experiences—i.e.: traveling, attending concerts—rather than material items. These factors coupled with inflation, student loans, and other debts leave a large portion of this generation with an unclear future when it comes to owning a home. Plus, since the 2008 housing crisis, qualifying for a home loan has gotten much more difficult. Very few people, especially young adults, are able to save enough for a down payment.
According to a report by the Institute for College Access & Success, student-loan debt is a common issue among recent college graduates. About 70% of seniors who graduated from public and nonprofit colleges in 2015 had student-loan debt, averaging $30,100 per graduate.
Your student-loan payments are counted as part of your total monthly debts by mortgage lenders. Therefore, lenders want your total monthly debts, including your new mortgage payments, to be no more than 43% of your gross monthly income. If your student-loan payments exceed this 43% limit, you may not qualify for your mortgage. In this case, you may need to consider a smaller mortgage or alternative mortgage types, such as conventional mortgages that are not insured by government agencies.
Your ability to handle monthly payments to repay the amount you plan to borrow is measured by your debt-to-income ratio (DTI). This ratio is calculated by dividing all your monthly debt payments by your gross monthly income. Different lenders and loan products will have varying DTI limits. To calculate your DTI, add up your monthly debt payments and divide them by your gross monthly income. Gross monthly income refers to the amount earned before taxes and other deductions are taken out.
How to Buy a House with Student Loan Debt
Buying a house with student loan debt can be challenging, but it's not impossible. Here are some steps you can take:
- Improve your credit score: A good credit score can help you qualify for better mortgage terms, such as a lower interest rate. Pay your bills on time, pay down your credit card balances, and avoid opening new credit accounts.
- Pay down your student loan debt: Paying off some or all of your student loan debt can improve your debt-to-income ratio (DTI), which is an important factor that lenders will use when they are evaluating your situation and determining whether to approve you for a mortgage.
- Consider an FHA loan: FHA loans are designed for first-time homebuyers and require a lower down payment (as low as 3.5%) than conventional loans. However, your student loan debt will still factor into your DTI, so make sure you can afford the monthly payments.
- Explore down payment assistance programs: Many states and cities offer down payment assistance programs for first-time homebuyers. Some of these programs also offer help with closing costs.
- Shop around for mortgage lenders: Different lenders have different requirements and may be more willing to work with you if you have student loan debt. Get pre-approved for a mortgage so you know how much house you can afford.
- Consider a co-signer: If your credit score or DTI is too high, it could be helpful to ask a family member or friend with good credit to co-sign on the mortgage.
Remember, buying a house is a major financial decision, so take the time to do your research and make sure you can afford the monthly payments. Consult with a financial advisor or a mortgage lender to help you understand your options.
Getting an FHA Loan with Student Loan Debt
FHA Loans can make the loan qualification process easier and lowers the required down payment from over 10% to around 3% of the loan amount. This lowered up-front cost plus more lenient credit score requirements put qualifying for a home loan within reach of millions of Americans who would otherwise not be able to qualify.
Learn more about FHA loan requirements
However, having student loan debt may make it challenging for you to qualify for an FHA-insured mortgage if you are making monthly student-loan payments. FHA loans require only a 3.5% down payment, even for borrowers with low FICO credit scores, which can be critical for many borrowers. This is why student loan debt can be a significant problem for many.
FHA Student Loan Guidelines
FHA lenders are now required to take into account the actual payment amount for student loans (or .5% of the student loan balance if there is no payment requirement) as part of the borrower's monthly obligations when determining whether they meet the maximum debt-to-income ratio.
In June 2016, FHA guidelines were updated to factor in student loans for qualifying ratios. The recent change in June 2021 made it easier to qualify for an FHA loan. The new guidelines specify that the lender must use the actual payment amount reported on the credit report or a half percent (.5%) of the student loan balance if there is no payment requirement.
Deferred payments cannot be excluded from the debt-to-income ratio calculation. If the payment reported on the credit report is less than .5% of the student loan balance, the lender can use the lower payment for qualification purposes. Borrowers with no reported payment requirement can contact the lender or student loan servicer to agree on a lower payment amount that is less than .5% of the loan balance.
FHA guidelines indicate that your loan cannot be approved if you are delinquent on any government loan. Therefore, if your student loan is government-backed and it is in default, then you likely will not be approved for an FHA loan.
Student Loan Resources
To better manage your student loan debt, consider: