How Are Student Loans Taken into Consideration When Applying for a Mortgage?


student loans and mortgages

Every year, millions of young adults continue their education by attending college. Although college opens many opportunities to pursue careers and interests, attending higher education may also result in large student loans lasting years.

Federal Student Loans require 10-year repayment plans for all student loan borrowers. However, on average, student loans can take up to 21 years to pay off. After 20-years, the remaining debt is forgiven under the Federal income-based repayment options.

Millions of millennials are struggling with significant student debt, as well as attempting to start their adult lives. Large student loans has a large impact on qualifying for a mortgage to purchase a home.

Although first time home buyer demand is low among recent graduates, a 2015 study by Zillow (leading real estate website) states student loans have a minimal impact on becoming a homeowner. College graduates with a four-year degree and no student loans have a 70% chance of owning their own home. This probability drops to 66% for a bachelor’s degree holder with $50,000 in student debt.

Lenders are required by law to examine all material debt in your credit history. Factors such as debt-income ratio, assets, savings, and size of the down payment are considered financial background and examined by lenders during the application process. Monthly student loan payments $50 or higher as well as student loans with multiple lenders reduce mortgage borrowing opportunities.

How are Student Loans taken into consideration when applying for a mortgage?

If you are saving money and looking to invest in long term housing, strategize your earnings and savings for a down-payment. Age, experience, and income play a vital role in homeownership.  The experience of your work, savings, and accompanied credit history are considered when applying for a mortgage.

Debt-to-Income Ratio

Debt-to-income (DTI) is your monthly income going towards paying bills. Mortgage lenders analyze your ratio to determine if you’re able to make monthly mortgage payments and repay debt.

DTI ratio is your total monthly debt divided by your gross monthly income. The standard DTI ratio has 41% threshold. Anything even slight above 41% may prevent you from getting the home loan.

Credit History

Similar to other loans, credit score is the most important factor when attaining a mortgage home loan. Lenders use this measurement as a key aspect to determine if you’re eligible to receive the loan. Unless you miss payments, student debt does not impart credit history.

It’s smart to clear any outstanding credits with other lenders 6 months prior to applying for a mortgage. Doing this, will help your chances of getting the mortgage.

Employment History

Lenders also consider your employment history. While applying for a mortgage, some lenders may be specific with income numbers in the mortgage application.They may not approve loans unless you have at least two years of employment history. Depending on lender, some may be satisfied if you stay with the same employer, while others are satisfied if you stay in the same industry.

Lenders explore the overall mortgage application. Mortgage companies now have services such as pre-approvals to assist you in finding your dream home.