It’s believed this issue is slowing down the economy and dragging down the financial futures for many people, young and old.
One of the perceived ways that the student-loan crisis is slowing the economy is through real estate. It’s thought that if people have high amount of student loans, they can’t get a mortgage and, therefore, can’t purchase property.
The truth, however, is a little different.
The Myth: You Can’t Get a Home Loan with Student Debt
There is plenty of logic behind the myth, and it’s mostly based on the assumption that a former student’s debt-to-income ratio, or “DTI,” will stop their application cold. A person’s DTI is simply a reflection of their overall debt load compared to their income, and it’s usually calculated on a monthly basis.
For example, if a borrower has $1,000 in total monthly debt payments and earns $4,000 a month, their DTI is 25%. ($1,000 is 25% of $4,000.) Lenders, loan officials, and policy makers prefer borrowers to have a relatively small DTI; anything approaching or exceeding 50% represents a significant risk of missed payments, default, and even foreclosure.
(It’s important to note that debt total is not really considered in DTI; only the current monthly payments.)
Student loans clearly increase a person’s debt ratio. So, according to the myth, because people have high student loans that increase their total debt burden, they won’t be able to secure home-loan financing of any kind.
But, fortunately for college graduates, having student-loan debt does not automatically disqualify you from a loan.
The Truth: There are Numerous Mortgage Options Available for People with Student Debt
The myth, as we have described, is based on the concept of a person’s DTI. But, as we will show, most student loan debt is not so high that it ejects you from potential homeownership.
First, let’s examine what lenders look for in a borrower’s DTI. For most loan products, and for most lending institutions, you need to have a DTI around 45% or lower. However, this will fluctuate. For FHA loans, as an example, you can secure financing if you have a DTI of 43% or lower in most cases, while some options actually let you have a ratio over 50%, although these are fairly rare.
Conventional loans usually require about 50%, although these can vary widely. We could go over the ratio requirements for each mortgage option, but the point is clear: borrowers with ratios around 45% or lower can find financing for a home.
So how do student loans impact most people’s DTI? According to the Federal Reserve, for students “who were making payments, the typical required monthly payment was between $200 and $299 per month.” So let’s just go with the high side of those numbers and use $299 as our monthly payment. Now what about the other part of DTI: income? The Bureau of Labor statistics says that the median annual salary for all employees in May 2020 was $41,950. Divided by 12, this means a monthly salary of roughly $3,829.
This is a very unscientific approach, and it uses a lot of inconsistent data, but if we assume a student-debt payment of $299, and a monthly income of $3,829, the student-loan payment is only 7.8% of the monthly earnings. Alone, that won’t keep you from getting a mortgage.
What is we raise the student debt and lower the income? Suppose you have a large monthly payment of $500 and only earn $2,000 a month. In this case, your student loans are still only 25% of your monthly earnings. If your car loans and consumer debt is low, you may still qualify.
Again, this isn’t a perfect example, but it highlights the point that many people with student loans will still qualify.
Loan Options for People with Student Debt
The simple truth is that there is no specific loans for people with student debt. On the contrary, most loan options are perfectly viable solutions for anyone with loan payments.
Conventional loans are the most common type, and they are extremely popular for borrowers of all varieties. The debt-to-income requirements for these loans typically vary more than any other type, but borrowers can secure financing with debt ratios around 45% or less.
Fannie Mae HomeReady
Former students with large loan bills often struggle to generate a downpayment. This makes the HomeReady Mortgage from Fannie Mae an attractive option. If your credit score is decent (620 or higher), you may qualify for a loan with as little as 3% down. This is one of the lowest downpayment requirements available in the mortgage industry.
If you are purchasing in a specific rural or suburban area, you may be able to secure financing with no downpayment at all by using a USDA loan. These loans are intended to support certain areas, so they are entirely dependent on where you purchase. However, thanks to 0% down, they may a great option for people with student-loan payments that often lower savings.
The Federal Housing Administration, overseen by the Department of Housing and Urban Development, has a mission to support homeownership. To this end, they support loans that meet specific requirements, which are usually generous in order to encourage buying. For FHA-supported loans, you’ll need a ratio of 43% or less, although this can be higher depending on the organization servicing the loan. However, the FHA does allow higher DTIs if you have a high credit score, which is entirely possible if you have been making loan payments.
Get an Affordable Mortgage Even if You Have Student Loans!
Don’t believe the myth! If you have student loan payments, don’t assume that a mortgage is out of the question. There are plenty of options, but you need to work with the right loan professional.
Contact our staff today and let us help you secure a world-class loan for your next purchase!
Not all applicants will be approved. Applicant subject to credit and underwriting approval. CrossCountry Mortgage, LLC is an FHA Approved Lending Institution and is not acting on behalf of or at the direction of HUD/FHA or the Federal government.
Subject property and borrower income and credit must qualify to USDA guidelines.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. CrossCountry Mortgage, LLC (“CrossCountry”) does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by CrossCountry.