Highlights:
- If you have a large amount of student debt, it can hinder your ability to buy big and get into other debts.
- Your credit score can be improved by making timely student loan repayments.
- It is possible to get a mortgage even if you have student loans.
According to the Institute for College Access & Success, most U.S. students graduate with student debt. 62% have either federal or private loans. According to Institute for College Access & Success’s latest data, in 2019 graduates owed a median of $28,950.
If you have a large amount of student loans, it can be difficult to buy big items or get a mortgage. You may need to consider additional factors if you are a student with significant debt and want to get a mortgage for a house.
Below you can read about the impact of your credit scores, debt-to-income and savings on your ability get a loan to pay student debt.
1. How can student loans affect credit scores?
Credit scores are numbers that range between 300 and 800. They indicate the creditworthiness of a person, or their reliability in repaying credit lines that they have received. The higher a score, then the more likely a potential lender is to view borrowers as reliable.
Lenders use your credit score and credit report to decide whether to lend you money.
If you are a student with a lot of debt, it is still possible to maintain high credit scores if you keep your debts low, pay them on time and have a good credit balance.
Making timely payments for student loans can help you improve your credit score. If you’ve had trouble paying on time, your credit score may be affected if you apply for a home loan.
Credit mix is a small part of your overall credit score, but it can help to boost your numbers. Open a new line of credit or credit card to increase your credit mix. Just make sure that you can pay off your balance. Open new credit accounts may also affect your credit score.
You will want to also keep an eye on the credit reports you receive to make certain that they are accurate. Sign up for a free myEquifax Account and you will receive six free Equifax credit reports per year. You can also obtain free weekly credit reports from each of the three nationwide consumer reporting agencies — Equifax, Experian and TransUnion — through April 2022 at www.annualcreditreport.com.
2. What is included in the debt-to income ratio of a mortgage loan?
The amount of student loans you owe will likely affect your debt-to income ratio (DTI). This is another number that lenders use to determine whether or not they should lend you more money.
Divide your total monthly income by all of your debt payments. The more you owe, the higher the DTI. And the less you are likely to get a mortgage.
DTIs of up to 50% are acceptable by some lenders.
You can reduce your DTI if you want to be able to get a mortgage. Either increase your income by getting a second or third job, or lower your debt. You should pay down your debts as much as you can, and avoid adding to them.
3. Should you pay off debt or save for a down payment?
When applying for a home loan with student debt, you should also consider how this debt will impact your savings.
You can use a portion your monthly income to pay off your debts. Otherwise, you could save money for a mortgage down payment.
You can get a mortgage if you have about 20 percent of your home’s price as a downpayment.
You can still get a mortgage with a lower down payment by turning to the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs.
In the end, you can still get a loan if your student debt is low, but it will be harder. You should consider the factors listed above to determine if you can afford to buy a house while paying off your debt.
