Still got massive student loan debt on the books? Join the 43 million other borrowers who do too. And among all the millennials who are still chipping away at their student loan debt, over one-third of them plan on buying a home within the next five years.
But with all that debt still to be paid off, is getting a mortgage and purchasing a property a futile endeavor?
Student loan debt – just like any other type of debt – can be an obstacle to overcome when it comes to getting approved for a mortgage. But while the situation isn’t exactly ideal, it’s less dreadful than many millennials might think.
Understanding how student loan debt can affect lenders’ decisions will help you determine the likelihood of getting approved for a mortgage, and what type of interest rate you can expect to be offered.
Monthly Payments Matter
Lenders look at a bunch of things when figuring out if you make a good candidate for a mortgage, including how much debt you’re currently carrying and how much it takes up your monthly income. This is referred to as your debt-to-income ratio – the percentage of your monthly gross income dedicated to paying off debt – which lenders look at before they consider approving you for a home loan.
If you’ve got a ton of outstanding student loan debt and your current salary isn’t very much just yet, your debt-to-income ratio won’t be the greatest. Lenders usually like to see a debt-to-income ratio of no more than 36, but each lender might have their own threshold that they may agree to work with.
Let’s say your gross monthly income is $5,000, and other monthly debt obligations – including your student debt – amounts to $2,000. That means your debt-to-income ratio is 40%, and that’s not including what it would be after adding a monthly mortgage payment on top of it.
If you find that you’re over the limit of what your lender deems acceptable, you can always choose to extend your repayment period to reduce your monthly payments. However, it’s important to note that it’ll take a lot longer to pay off your mortgage this way, not to mention the fact that you’ll be paying more in interest over the life of the mortgage.
Refinancing your private student loan to a longer loan term may also be an option. You might even find that you can lower your interest rate too by going this route. However, just like in the above scenario, you need to be prepared to accept a longer repayment term. Even if you’re able to negotiate a lower interest rate when refinancing, you’ll still likely be paying more towards overall interest by the time the loan is fully paid off.
Deferring Your Loans Plays a Key Role
You’ll likely have the option to defer your student loan for a certain amount of time, depending on your lender. That means you temporarily won’t be obligated to make your regular monthly payments towards your student loan debt. Sometimes you might even be able to work something out where no interest is accrued despite the absence of payments.
Deferring your payments for a short period of time can be a great way to save you money for a sizeable down payment, which will work in your favor when mortgage lenders look over your credentials.
On the other hand, this option may have a negative effect on your application. Lenders will estimate what your monthly payments will be based on the amount of money you still owe on your student loan, but this estimate does not factor in how much your payments would be if you opted for an extended repayment plan, for instance.
It’s important that you fill your lender in on precisely how much you’ll be paying every month after the deferment period ends so that the most up-to-date and accurate data is used to grade your mortgage application.
Your Payment History is a Critical Factor
The amount of money that you owe in student loan debt – among other types of debt – as well as your income, are important factors that your lender will consider, but they are not the only ones. Your credit score also plays a critical role, and it’s heavily influenced by your history of making payments.
If you’ve been delinquent on payments, your credit score will plummet. In fact, even one missed payment can shave off as much as 100 points from your credit score.
Making your monthly payments on time and in full is essential to maintaining a healthy credit score. If you’re scraping the bottom of the barrel just to make your payments, then reducing your monthly payment amounts by extending your repayment period or consolidating your debt might help to bring your monthly payments down. That way, the amount you have to pay each month will fit more comfortably within your budget, and will help you stay on track with timely payments.
The Bottom Line
Student loan debt isn’t exactly something that mortgage lenders want to see on your books, but with millions of millennials looking to buy over the next five years, it’s something they’re becoming increasingly accustomed to. The fact of the matter is, student loan debt doesn’t mean you’ll be written off completely.
Your income and overall debt amount certainly count, but so does your proven ability to repay whatever loans you’re currently responsible for. Solid money management can go a long way in boosting the odds of your mortgage lender stamping “approved” on your loan application.