What students should know when looking to buy a home
Income Barriers for Students Seeking a Mortgage Loan
When applying for a mortgage, lenders will consider your debt-to-income ratio, which is your monthly debt payments divided by your total gross monthly income. This measure helps the lender assess your ability to repay your monthly dues and pay off your mortgage loan. Considered monthly obligations can include student loan payments, family expenses, spousal support, revolving accounts (like credit cards), or car payments.
Note: Lenders typically want to see a debt-to-income ratio of 43% or lower.
The lower your debt-to-income ratio, the more attractive you are as a borrower in the eyes of the lender. A lower ratio indicates that debt consumes a smaller portion of your income, giving you more money to cover your mortgage payments.
However, unless you work full-time while studying, there’s a good chance your debt-to-income ratio is higher than lenders prefer. While this doesn’t necessarily mean the lender will reject your mortgage application, you may need to settle for a smaller mortgage amount.
“The debt-to-income ratio for students often limits the amount of mortgage they can obtain,” wrote Jim Duffy, branch partner at Alcova Mortgage, in an email to The Balance. “If they cannot find a home within a significantly lower price range, they may have to continue renting.”
How Student Loans Affect Mortgage Applications
Monthly student loan payments are added to the “debt” side of the debt-to-income equation. Lenders view student loans in different ways.
For example, for loans backed by the Federal Housing Administration (FHA), a change in 2021 means the actual monthly payment for your student loan on your credit report contributes to the debt-to-income equation, as long as it is more than $0 per month. If your monthly student loan payment is $0, lenders will include 0.5% of your total student loan amount in the debt-to-income ratio.
For conventional loans like those provided by Fannie Mae, borrowers relying on income-based repayment plans can qualify with a $0 payment, provided they have documentation demonstrating this plan. For deferred loans or those in forbearance, the lender will take 1% of the student loan balance if you’re paying $0 or less. Freddie Mac uses 0.5% of the total debt or the actual payment (as long as it’s over $0).
Note: More than 80% of the mortgages insured by FHA are for first-time buyers. According to FHA estimates, over 45% of these borrowers also have student loans.
Mortgage Programs for Borrowers with Student Loans
There are specific mortgage programs designed to help homebuyers with student loans. Here are a few examples:
SmartBuy 3.0 Program in Maryland
The SmartBuy 3.0 program is a program in Maryland that allows residents to purchase a home while simultaneously paying off student loan debts. As long as you have a 5% down payment, the state of Maryland will offer up to 15% of the home’s purchase price or $30,000, whichever is lower, to pay off your student loans. To qualify, you must live in Maryland and meet other specific requirements.
Program
Student Loan Assistance Grant in Newburgh Heights, Ohio
If you purchase a home in Newburgh Heights, Ohio, you may be eligible for a grant of up to 50% of your student loans, with a maximum of $50,000. This program requires the purchase of a single-family home valued at at least $50,000 in the Village of Newburgh Heights and living in it for at least 10 years after the grant approval.
Note: To find available local programs in your area, check your local city website or your state’s housing department.
How to Buy a Home as a Student
While buying a home as a student is not an easy task, it is certainly possible. To turn your dream of homeownership into reality, explore the requirements set by your local bank. Then, create a plan to improve your debt-to-income ratio. You may need to work part-time or increase your hours at your current job. If your debt-to-income ratio is high due to monthly student loan payments, inquire if your payments are reported or calculated correctly. You may qualify for a mortgage using the actual amount of debt you are paying, according to Davy, or by applying for an income-driven repayment plan with lower monthly payments.
Note: Before enrolling in income-driven student loan repayment plans, you should consider the long-term implications, benefits, and drawbacks.
Additionally, you may want to boost your credit score and save for a down payment, as most lenders will require a down payment. With some creativity and hard work, you may become a homeowner as a student.
Frequently Asked Questions
Can student loans be used to buy a home?
You cannot use a student loan to buy a home. To purchase a home, you will need to have savings or gifts for a down payment, in addition to extra liquid funds (such as cash or in an account) to pay any other closing costs. You may be able to utilize other accounts to assist with the down payment.
Why are mortgages and student loans considered “good debt”?
Since homes are likely to increase in value over time, they are considered “good debt.” Student loans may also fall into the “good debt” category—it is an investment in your future and may increase your marketability and earning potential.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Federal Reserve. “Student Loans and Homeownership”.
CFPB. “What is the Debt-to-Income Ratio? Why is a 43% Debt-to-Income Ratio Important?”.
U.S. Department of Housing and Urban Development. “Mortgage Letter 2021-13.”
Fannie Mae. “Selling Guide”.
Freddie Mac. “Debt to Income Ratio”.
U.S. Department of Housing and Urban Development. “Federal Housing Administration Takes Steps to Remove Barriers to Homeownership for Those with Student Loans”.
Maryland.gov. “Fact Sheet: SmartBuy 3.0 in Maryland”.
Village of Newburgh Heights. “Student Loan Assistance Grant Program”.
Source: https://www.thebalancemoney.com/mortgage-programs-for-students-5323459
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