3 Ways Student Loan Debt Can Affect Your Mortgage Application

You're ready to buy a home, but you're also paying back federal or private student loans. Will this make it more difficult to qualify for a mortgage?

Yes. But that doesn't mean qualifying for a mortgage while paying off student loans is impossible. Here's what you need to understand before starting the home buying process.

Debt-to-income ratio

When determining whether to approve you for a mortgage, lenders look at something called your debt-to-income ratio. This ratio shows how much of your gross monthly income — your income before taxes are taken out — your monthly debts eat up. If your debt-to-income ratio is too high, lenders won't approve you for a mortgage because they worry that you won't have enough money each month to handle this significant payment.

It's important to remember that mortgage lenders aren't as concerned about your total student loan debt as they are about the size of your monthly student loan payments. Lenders typically want all of your monthly debts, including your new mortgage payment, to equal no more than 43 percent of your gross monthly income. So, if your total debts — again, including that new mortgage payment — are at or under that percentage, your odds of qualifying for a mortgage loan are higher.

Your student loan payments are considered part of your monthly debt by lenders. For example, if you are paying $300 a month on your student loans, your lender will count that amount when calculating your debt-to-income ratio. If that $300 payment pushes your debt-to-income ratio past 43 percent, you might not be able to qualify for a mortgage.

A deferment won't help

Your student loan might be in deferment while you are applying for a mortgage, meaning you won't have to start making payments on it for six to 12 months. You might think this will help your debt-to-income ratio. After all, when you're applying for your mortgage, you aren't making those student loan payments.

But this isn't the case. Lenders will still count your student loan debt against you. That's because lenders know that long before you pay off your mortgage, you'll have to eventually start making those monthly student loan payments. Lenders don't want your mortgage payment to be affordable for 12 months but then suddenly turn into a burden once your student loan payments kick in. When your monthly debts suddenly rise, you might no longer be able to afford those mortgage payments that you were once able to handle.

Loans insured by the Federal Housing Administration, better known as FHA loans, were once an exception to this rule. In the past, student loan debt that was deferred for more than 12 months before a mortgage's closing was not counted in applicants' debt-to-income ratios. That changed last year, when the FHA amended its rules. Now, if the lender doesn't know what the monthly student loan payment amount will be when the deferment ends, it must count 2 percent of applicants' total student loan debt as part of their monthly debt.

So if you have $30,000 worth of student loan debt, under the new FHA rules, $600 will be added to your monthly debt levels, a figure that could push you over that 43 percent threshold.

Borrowers might actually help themselves by getting their student loans out of deferment. That's because their actual monthly payments could be far lower than 2 percent of their total student loan debt. If loans aren't in deferment, lenders will use the actual amount borrowers are paying each month on their student loans. (See also: 4 Things You Need to Know About Deferring Student Loans)

Missed student loan payments can hurt, too

Student loan debt doesn't just make reducing your debt-to-income ratio harder. It can also hurt your credit score, if you're not careful about making your payments on time.

In addition to debt-to-income ratios, lenders also rely on borrowers' FICO credit scores when determining who qualifies for a mortgage. Most lenders consider FICO scores of 740 or higher to be exceptionally strong. If your score is under 640, you'll struggle to qualify for a mortgage without paying high interest rates. If your score is under 620, you'll have a hard time qualifying for a mortgage at all.

Paying your bills late is one of the biggest reasons for a low credit score. Your student loan payment is officially considered late when it is 30 days or more past due. A single late payment can sink your credit score by 100 points or more. On the other hand, making your student loan payments on time every month will help your score, making you a more attractive borrower.

What you can do about student loan debt

What can you do if your student loan debt is hurting your debt-to-income ratio? You can always improve your ratio by earning more income each month, perhaps by taking on a second job. The more income you make without increasing your monthly debt, the lower your debt-to-income ratio will be. (See also: 15 Ways to Pay Back Student Loans Faster)

You might also try to consolidate your student loan payments into one loan with a lower monthly payment. That will reduce your overall monthly debt obligation, again improving your debt-to-income ratio.

Reducing other monthly debts — anything from trading in a car with a high monthly payment to paying off your credit cards — can help, too.

Then there's your choice of home. Buying a lower-priced home will result in a lower monthly mortgage payment. That will also reduce your future monthly debt and lower your debt-to-income ratio.

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