Mortgage applications and Student Loan Consolidation

Michael Lux Blog, Consolidation, Student Loans 1 Comment

For most recent grads the two biggest financial goals are buying a house and paying off student loans.  Unfortunately, the steps taken to accomplish one goal can get in the way of the other if you are not careful.  The classic example of this conflict comes with student loan consolidation and trying to qualify for a mortgage.

If done properly, consolidating your student loans can make getting a mortgage easier.  A mistake in your consolidation planning can make getting a house even more difficult.

How does student loan consolidation affect my mortgage application?

The two big factors on your mortgage application are your credit score and your monthly debt to income ratio.  Student loan consolidation can affect both these numbers.  Surprisingly, the consolation process can help or hurt your credit score and it can help or hurt your monthly debt to income ratio.

Consolidation and your credit score

How it helps – When you consolidate your loans you close multiple smaller amounts and ope one large account.  The credit scoring systems look at one large debt more favorable than they look at many smaller debts.

How it hurts – In the short-term, consolidating your student loans can hurt your credit score.  This is especially true if your oldest account/line of interest is a student loan.  Having an account open and keeping it in good standing help your score.  Closing one of these older accounts can cause a temporary dip in the score.  Along the same lines, if you are consolidating with a private company, the pulling of your credit report can cause a dip in your score.

Ultimately, the credit score impact is relatively small.  If you have an excellent credit score, you shouldn’t have much of an issue.  If you are on the border, or worried about the impact of consolidation on your credit score, your best bet is probably to consult a mortgage professional.

Consolidation and your debt to income ratio

How it helps – When you consolidate your student loans with a private lender, you may be able to secure lower interest rates or more time to pay off your loans.  By getting a lower interest rate or more time, your monthly payments will be lowered.  Lower monthly payments means a better debt to income ratio.

How it hurts – Many people who chose to consolidate their loans actually opt for a slightly shorter repayment term.  As a general rule the less time you have to pay off your loan, the lower the interest rate.  In many cases paying just a little extra each month can get your loan paid off much sooner.  If you go this route, it saves you money in the long term, but the larger required monthly payments hurt your debt to income ratio.

Putting together a plan

Mortgages and student loans are both incredibly expensive and require years to pay off.  Before you reach any decision, talk to mortgage professionals and student loan lenders to get a better idea of the feasibility of your plan.  At least one company, SoFi, offers student loan consolidation services and mortgages.  If you get to talk to someone with experience dealing with both products, you can flesh out all of your options.

  • Kimberlee Meserve

    In order to get a mortgage I had to lower my monthly payment, but had a really difficult time finding someone to consolidate my loans. I extended my payment period with Navient in order to reduce my monthly debt to income ratio, and was able to buy a really great starter home with my boyfriend. I’m actually paying less a month on my mortgage (including taxes) than I was on rent. Its been a few months since I bought my house and I really would like to consolidate my student loans to reduce the interest rate. I STILL can’t find anyone to consolidate my 70,000 and I even spoke to a few of the lenders I applied with to try to figure out why no one would give me a loan, and they said it had to do with my debt to income ratio. How is it that I was able to buy a house with the debt to income ratio I have, and I can’t even manage to consolidate my student loans? The worst part is, is that no one gives a shit that my credit score is excellent, they said they don’t even consider the credit score as a factor in giving a loan. I feel like I’m being penalized for paying my bills on time 🙁