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Buying a house is a big step, and it’s important to consider all the factors that will affect your ability to make the purchase. One of those factors is student loans.

Student loans can be used for anything from paying for tuition to buying books and supplies, but they’re also sometimes used for living expenses like rent or food. If you’re thinking about buying a house, there are two things you should know: first, the government requires all lenders to check whether you have student loan debt when you apply for a mortgage. Second, if you have student loan debt that has not been discharged in bankruptcy or through other means (for example, by using an income-driven repayment plan), then lenders won’t consider your income as part of the process of qualifying for a mortgage.

So what does this mean for your ability to buy a house? It means that if you have student loans but no other debts—like credit card bills or car loans—then your lender will only look at your income to determine whether it’s sufficient enough to cover your monthly payments on the mortgage contract. If your monthly payments exceed what they’d expect someone with similar income levels would pay on their own home (not just on rent), then they won’t approve the loan

Do Student Loans Affect Buying a House?

Student loan debt affects your debt-to-income ratio, credit score and ability to save for a down payment.

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Your student loan debt affects whether you can buy a house, in both direct and indirect ways. Here’s how:

• Student loan payments make saving for a down payment more difficult and mortgage payments harder to handle once you’re a homeowner.
• Student loan debt may increase your debt-to-income ratio, affecting your ability to qualify for a mortgage or the rate you are able to get.
• Missing a student loan payment can lower your credit score, but consistently paying on time can bolster it.

Having student loans, though, doesn’t mean you’ll never be able to get a mortgage. Here’s what you should know as you explore your options.

Student loan payments hinder savings

Sending hundreds of dollars a month to your lender or servicer may feel like the most immediate, and most frustrating, way student loans affect your ability to buy a house.

But saving up 20% of the home’s value for a down payment, traditionally the ideal amount, isn’t always necessary. Look into first-time home buyer programs in your state, which can provide money for the down payment, or low-down-payment mortgage options.

Federal agencies like the Federal Housing Administration and the U.S. Department of Veterans Affairs also offer mortgages that require smaller down payments — or none at all, in the case of VA loans.

Student loans add to your debt-to-income ratio

When deciding whether to approve you for a mortgage, lenders look at how much debt you already have compared with your pretax income. That’s called your debt-to-income ratio, known as DTI, and it’s calculated based on monthly debt payments.

There are different types of debt-to-income ratios, and not all mortgage lenders calculate them the same way. But in general, car loans, student loans, minimum credit card payments and child support all factor in. The more debt you have — or the lower your income — the higher your DTI will be.

A DTI of 36% or less is ideal, but government-backed mortgages, like FHA loans, may approve you with a DTI of up to 50%.

Consider focusing on paying off student loans, or credit cards if they have higher interest rates, and don’t add to your debt before buying a home. You could aim to get rid of one student loan payment before you apply for a mortgage; paying off the loan with the highest interest rate will save you the most money over time.

Refinancing student loans to a lower monthly payment may also reduce your debt-to-income ratio. But it adds a line of credit to your credit report and may extend your repayment timeline. Make sure you refinance six months to a year before you apply for a mortgage. That lets positive payment history offset the credit score dip that may occur from shopping for a refinance loan.

Student loan payments affect your credit score

A higher credit score means a better chance of getting approved for a mortgage and receiving a favorable interest rate. Payment history makes up 35% of your FICO score, one of the two main credit scoring models, and mortgage lenders want to see a history of on-time debt payments.

Consistently paying student loans on time will strengthen your score. On the flip side, a missed payment or letting your loans default will hurt it.

Credit mix is a smaller component of your score. But using a variety of credit types — such as student loans, car loans and credit cards — can help your score as long as you’re making payments on time.

Do student loans affect buying a house?

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Student loans can be a major roadblock when pursuing other financial goals, like buying a house. Lenders like to approve borrowers with minimal debt, mostly because taking on a second loan payment increases the risk of defaulting on one of the loans — or both. Beyond the challenges of getting approved, student loans can also make it harder to save for important things like a down payment, closing costs and moving expenses. However, there are ways to minimize the impacts of your student loans.Key takeawayWhile student loans will inevitably affect your debt-to-income ratio and make it harder to save up for a down payment, there are plenty of areas where you still have some control.

Do student loans affect buying a house?

There are a few different ways your student loans affect your finances, including your debt-to-income ratio, savings potential and credit score. All of these could contribute to your ability to buy a house.

Student loans add to your debt-to-income ratio

Lenders use the debt-to-income (DTI) ratio to determine your eligibility. DTI includes all of your monthly debt payments divided by your monthly gross income.

Most mortgage lenders require your total DTI ratio, including your prospective mortgage payment, to be 43 percent or less, though it’s possible to find lenders that will accept a higher DTI. Having a high student loan payment, in addition to your other monthly bills, could push your DTI past the required threshold and make it harder to qualify.

Student loan payments hurt your ability to build savings

Buying a house requires an upfront down payment, usually totaling multiple thousands of dollars. Borrowers with student loan payments may find it difficult to save for a down payment on top of their monthly student loan bills, which can easily delay their ability to buy a house.

For example, having a student loan payment of $400 per month means you are missing out on $4,800 in potential savings for a home each year.

Student loan payment history factors into your credit score

Payment history is the most crucial factor in your credit score, accounting for 35 percent of the total score. Borrowers with an on-time track record will see their score increase, while those who have made late payments on their student loans will see a reduced score. Consumers who have loans in default will also see a dip in their score.

Mortgage lenders heavily weigh your credit score when determining your approval chances and your interest rate. If you’ve had trouble paying your student loans on time, your chances at qualifying for a mortgage could be hurt.

The good news for borrowers? Credit bureaus generally give more weight to recent mistakes over past ones, meaning any mistakes you made at the beginning of your student loan repayment journey will have less significance over time.

Should I pay off student loans before buying a house?

If you’re like the average borrower who is paying off their student loans over a 10-year timeline, waiting to purchase a home until your loans are gone is probably a bad idea. Of course, this means the same is true if you’re paying off your student loans over 15 or 20 years, or if you’re currently paying them down on an income-driven repayment program.

There are several reasons you shouldn’t wait to buy a home if you’re ready, the biggest of which is the inevitable increase in housing prices and mortgage rates. A recent report from the National Association of Realtors (NAR) showed the median sales price of existing homes increasing 22.9 percent nationwide from August 2020 to August 2021. If student loan interest rates are hovering around 5 percent, it makes a lot more sense to lock in a home now before prices increase even more.

This same concept applies for borrowers who are trying to save up a down payment for a home. As prices rise, trying to save up 20 percent for a down payment becomes considerably harder.

With all this being said, it could make sense to pay off student loans before you buy a home in certain scenarios. If you can pay off student loans in one year or less and just want them out of your life, for example, you might want to stay the course and wipe out your loans as fast as you can. The same is true if student loan payments are taking up a significant portion of your monthly budget and a mortgage payment would add undue hardship.

Ways to buy a house with student loan debt

Plenty of people who buy a house also have student loan debt. A few ways to manage your student loan debt while buying a house include:

• Apply for down payment grants: Local and national down payment assistance programs can provide down payment grants to first-time homebuyers. These grants will cover part or all of your down payment. Borrowers usually need a credit score of 600 or more.
• Look into 0 percent down payment loans: Former and current service members are eligible for VA loans, which do not require a down payment. Those who buy homes in rural areas can also take out a USDA loan, which has a 0 percent down payment.
• Decrease your DTI: Because the DTI factors in only your monthly debt payments and not the total remaining amount, you can decrease the DTI by paying off some small debts quickly. You can also switch to a longer student loan repayment plan — such as the extended repayment plan or an income-driven repayment plan — to reduce your monthly student loan bill.
• Refinance your student loans: Borrowers who took out private student loans when interest rates were high should consider refinancing to a lower interest rate. Refinancing to a lower rate will save you interest and possibly decrease your DTI, making it easier to qualify for a mortgage.

Student loans are a huge burden for many people, and it’s no secret that student debt can make it harder to buy a house. But there are ways to get around the issue and get into your dream home.

If you’ve got a lot of debt, the first thing you should do is look into getting some help with it. You may be able to refinance your student loans with a lower interest rate or consolidate them into one new loan with a lower monthly payment. This will allow you to save more money each month, which will help you build up equity faster when it comes time to buy your home.

You can also consider taking out an additional mortgage if your income isn’t high enough right now. This will allow you to buy more than one property at once without having to pay rent on two separate places, which means even more savings in the long run!

Finally, consider moving somewhere where housing costs less money per square foot than what’s available where you currently live—this will make it easier for you to afford a bigger house or apartment without having to pay extra money on top of what it costs already just because someone else wanted something fancy instead of practicality (and/or so they could brag about having “more space”).

The bottom line

Student loan debt may be part of your life for a decade or longer, but this doesn’t mean you have to wait to buy a home. The key considerations you’ll want to keep in mind are your credit score, your income, your other debts and the down payment you can save up before you start your search.

At the end of the day, your student loan payment is just another bill you have to pay each month. With some smart financial moves, your student loans don’t have to ruin your dream of homeownership.