How to Handle Student Loan Debt When Buying a Home

Student loan debt can discourage potential homebuyers in a variety of ways. Between raising your debt-to-income ratio and making it harder to save for a down payment, securing a mortgage can often seem out of reach.

Despite the obstacles that come with paying off any amount of debt, your student loans don’t automatically disqualify you from becoming a homeowner.

According to a 2019 survey conducted by Bankrate, 61% of millennials don’t own a home, with nearly a quarter of them saying their student loan debt is preventing them from making the purchase.

However, mortgage lenders expect that you may be carrying debt. Whether it’s from your student loans, a car, or credit cards, lenders fully understand that borrowers are typically managing a variety of expenses, which is why becoming a homeowner may be more within reach than you’d expect.

Managing Your Debts

Some reports have indicated that credit card debt carries more weight than your student loans when it comes to buying a home. And while it’s important to stay on top of your student loan payments, shifting your budget’s focus towards tackling any credit card balances may improve your odds of securing a mortgage.

Paying off your high-interest consumer debts is typically quicker and easier than eliminating your student loans. Managing your credit card debt will improve your debt-to-income ratios while providing you with additional funds to put towards your student loans or a down payment.

How to Increase Your Credit Score

Mortgage lenders pay close attention to your credit score when determining your eligibility for a mortgage. One of the best ways to build good credit is by making consistent, timely payments on your balances. However, if you’re looking to improve your score as quickly as possible, you can also try the following:

Lower your credit utilization rate, or how much of your total credit you’re utilizing. The less of your available credit that you’re using, the more your score will improve. Considering that credit utilization accounts for approximately 30% of your score, this is one of the most effective ways to improve your credit.
Avoid new credit lines. Opening or applying for a new credit line results in a hard check on your credit score. Too many hard checks will negatively impact your overall score.
Keep any paid-off accounts open. Leaving long-standing accounts open, even if you’ve paid them off, will help establish the length of your credit history, which accounts for approximately 15% of your total score.

If you’re still concerned about your student loans negatively impacting your ability to secure a mortgage, try paying off some accounts early. Focusing on paying off each account in full, rather than making minimum payments on each account, will help you achieve a qualifying debt-to-income ratio.

Get Pre-Approved for Your Mortgage

A mortgage pre-approval is a great way to solidify your mortgage into your budget. Pre-approvals let you know how large of a loan you’ll qualify for so you can stay within your price range during your home search. Many pre-approvals include an estimate of your monthly payments, which is especially helpful if you’ll be managing student loan debt as well.

It’s important to secure a pre-approval so you can feel confident in shopping for homes within your budget. Pre-approvals also show sellers that you’re serious about becoming a homeowner and may make your offer more competitive than other buyers’.

Many people have successfully become homeowners while tackling their student loan debt. However, it’s important to make sure that your financial situation is stable before making one of your first big investments. Managing your debt-to-income ratio will help ensure that you’re ready to take the first steps towards buying a home.