Debt is one of the most common barriers to homeownership. Mortgage lenders are often loath to extend credit to wannabe homebuyers who owe four, five, or even six figures.
And while Americans can be in the hole for a number of reasons, student loan debt is one of the leading factors that hold a lot of would-be homebuyers down. In fact, almost one-third of student debt holders say the debt has prevented them from buying a home, according to the research team at Education Data.
Recently, the Biden-Harris administration set an executive action to provide up to $20,000 in debt cancellation to Pell Grant recipients (and up to $10,000 to non-Pell Grant recipients) who make less than $125,000 a year ($250,000 for married couples). But the student loan forgiveness plan isn’t a cure-all.
“It may help a group of young Americans move into a position to buy a home years ahead [of] what had become the norm,” says Ruth Shin, founder and CEO of real estate company PropertyNest in New York City. “However, we are also looking at interest rates rising as well as a scarcity of inventory on the market in the near future, so we may have to wait a couple of more years before we see a difference.”
Still, though, the path to homeownership for buyers with student loan debt might be less rocky in the future. Nearly 20 million borrowers are poised to have their student debt canceled completely, and an estimated 40 million people will be eligible for some relief.
“Homeownership is an achievable goal even if a buyer has student loan debt. It just may take some planning,” says Glenn Brunker, president of Ally Home in Detroit. “In addition to having an open and honest conversation with a mortgage professional about their unique financial situation, prospective homebuyers with student loans can take specific steps that will help them achieve homeownership.”
If you’re one of the many Americans preparing to enter the homebuying sphere with student loan debt, here are some tips and expert-approved recommendations for navigating the process.
Refinance your student loan and pay down private loans first
If you’re looking to buy a house in the near future, the first thing you should do is lower your monthly student loan payments by refinancing.
“Refinancing student loans and lowering the size of your payment is the best way to get a mortgage with a student loan on your record,” says Shri Ganeshram, CEO and founder of Awning, a real estate company for investors. “Lenders look at the size of your existing monthly debt load compared to your income when determining your eligibility to borrow. By refinancing your student loans, you could decrease your monthly debt payments and allow yourself to qualify for a mortgage.”
Ganeshram also urges borrowers to make paying off private loans a priority, because these types of loans typically carry an interest rate and are not part of President Joe Biden‘s student debt relief plan.
Understand the debt-to-income ratio
Your mortgage application won’t look very favorable if your debts far outweigh your income. And if you carry student debt, it’s going to affect your debt-to-income ratio.
Different lenders have different DTI limits. Get familiar with your preferred lender’s DTI limit, especially if you’re eligible for student loan debt relief.
“You’ve got to manage your debt-to-income ratio,” says Martin Orefice, CEO of Rent to Own Labs in Orlando, FL. “If you have a student loan balance, you may struggle to qualify for a mortgage. But the $10,000 (or $20,000 for Pell Grant recipients) in loan forgiveness [via the student debt relief plan] can help reduce your debt-to-income ratio.”
Inquire about getting an FHA loan
The student debt relief plan will help some wannabe homeowners, but other borrowers with high student loan balances might not reap the benefits.
“If individuals with a high student loan balance receive a $10,000 debt reduction, it will likely not change their ability to qualify for a mortgage to purchase a home,” says Eric Jeanette, president of Dream Home Financing and FHA Lenders in Adelphia, NJ. “The lower balance will not change the monthly payment unless lenders are forced to also recast the loan.”
“Buying a home with student loan debt is possible, and the easiest path is to use a Federal Housing Administration loan to finance the home,” Jeanette says. “FHA guidelines require lenders to use the actual payment amount or 0.5% of the student loan balance (when no payment is referenced) to determine the payment amount used in the debt-to-income calculation.
“If your student loan debt is $50,000, then the lender would use $500 as the monthly payment for the student loan in the debt-to-income ratio calculation,” he continues. “With many student loans in a deferred status, using the half-percent model for the payment is beneficial.”
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