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Student Loans and Mortgages: The Impacts and Strategies for Homebuyers

Student debt can make it difficult to buy a house, but careful mortgage planning can make a home loan possible for student loan borrowers.

Written By: Michael P. Lux, Esq.


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Many borrowers assume that student loans harm their credit score which, in turn, harms their chances of buying a home.

It’s true that missing payments or delinquencies on your student loans can negatively affect credit scores. However, the connection between student loans and credit scores is only a small part of the equation.

For most borrowers, the biggest impact of student debt is felt in the form of Debt-to-Income ratio analysis. Essentially, the larger your monthly student loan bills, the more difficult it can be to get approved for a mortgage.

This guide will cover how student loans can impact the Debt-To-Income ratio and explore the tools and strategies that borrowers can use to reduce or eliminate the impact of student loans on mortgage applications.

Student Loans and the Debt-to-Income Ratio

The debt-to-income ratio (DTI) is one of the most critical numbers in the mortgage application process. DTI is a calculation that compares how much you owe with how much you earn every month. Lenders use it to evaluate if you can afford to pay back a mortgage.

Lenders consider two DTI numbers. The first one is called the front-end ratio. The front-end ratio looks at how the mortgage payment you’re applying for compares to your monthly income.

Calculating the front-end ratio is relatively straightforward. Lenders will look at your expected monthly housing costs – this includes the anticipated principal, interest, property taxes, and insurance – and then divide that number by your monthly income before taxes. Tools such as the FHA Mortgage Calculator are excellent for estimating housing costs.

Here’s an example of the front-end ratio at work: Suppose the total expected housing costs are $1,000 per month and the applicant earns $5,000 per month. The front-end ratio would be .20 or 20% ($1,000/$5,000). Most mortgage companies prefer a front-end ratio below 28%, though some may accept up to 31% or slightly more under certain circumstances. It’s important to note that student loans don’t impact the front-end ratio.

The second DTI number that mortgage lenders look at is called the back-end ratio. This number is the one that causes headaches for student loan borrowers. Unlike the front-end ratio that considers only the expected housing costs, the back-end ratio calculates all monthly expenses compared to monthly income. Lenders typically want this ratio to be below 41%. That said, the highest acceptable back-end ratio can vary based on your credit profile. In some cases, lenders may approve ratios even above 50%.

The back-end ratio includes the following monthly bills:

  • current housing expenses
  • car payments
  • student loan bills
  • minimum monthly payments on credit cards
  • any other debt that appears on a credit report

The back-end ratio DOES NOT include the following monthly bills:

  • utility bills
  • food and groceries
  • cell phone bill
  • cable bills
  • retirement plan contributions to 401(k), IRA, and Roth accounts
  • most subscriptions

One final note on back-end DTI calculations: Lenders usually take yearly income and divide it by 12. If you get paid every two weeks, take your paycheck, multiply it by 26 and then divide by 12 for your monthly income.

Strategies to Improve Debt-to-Income Ratios

Fixing the back-end DTI isn’t an easy task. Most borrowers can’t just snap their fingers and have less debt. However, there are ways to tweak the DTI to lower your ratio.

Pay Down Credit Card Balances – For most types of debt, paying down the balance doesn’t change your Debt-to-Income (DTI) ratio. For instance, even if you pay more than needed on your car loan, your monthly car payment doesn’t decrease. Accordingly, your DTI remains the same. However, paying down your credit card balance lowers your minimum monthly payment. The lower your credit card balance, the less you have to pay each month. The less you’re required to pay monthly, the better your back-end DTI becomes.

Change Repayment Plans – One of the perks of federal student loans is the variety of available repayment plans. By changing to a plan like SAVE or PAYE, borrowers can potentially lower their monthly payments. Suppose a borrower has $35,000 in federal student loans and they are on the standard repayment plan. According to the federal loan repayment simulator, the monthly payment used in the DTI calculation would be $389. If that borrower switches to the graduated repayment plan, the payment lowers to $222 per month. Even though the student loan balance hasn’t changed, by switching repayment plans, the borrower can improve their back-end DTI. Many borrowers will find the lowest monthly payment using the SAVE plan.

Eliminate Smaller Balances – We’ve established that lowering the balance on most loans won’t reduce your monthly expenses. But, paying off an entire balance can make a huge difference. Typically, we suggest that borrowers pay down their highest-interest debts first. However, one notable exception is when borrowers are trying to improve their DTI for a mortgage application. By paying off a smaller loan in full, even if it is a low-interest loan, the monthly payment disappears from the credit report. Thus, one less debt means a smaller back-end DTI.

Refinancing Student Loans for Mortgage Applications

Another way to better your Debt-to-Income (DTI) ratio is by refinancing your student loans. Refinancing means finding a new lender who agrees to pay off some or all of your current student loans. You then pay back this new lender based on the terms of your new loan agreement.

People usually refinance to get a lower interest rate on their student loans. But, if you’re refinancing to help you qualify for a mortgage, the main goal is to lower your monthly payments. For example, while securing a lower interest rate is beneficial, extending the length of your loan can have a much bigger impact on reducing your monthly payments.

Please note that refinancing student loans is different than temporarily picking a new repayment plan. Before refinancing, borrowers should consider several factors:

Be Extra Careful with Federal Loans – Federal student loans have excellent borrower perks, like income-driven repayment plans and student loan forgiveness. If you refinance your federal loans with a private lender, you’ll lose access to these benefits forever. You should only refinance federal loans if you’re confident you can pay back the entire loan without needing those federal programs.

Shop Around – It’s important to compare options. Talk to several lenders because each one has their own way of evaluating loan applications. To make sure you’re getting the best deal, it’s a good idea to check rates with different lenders. We recommend applying with at least five different lenders to see what offers you can get.

Don’t Delay – The entire refinance process can easily take longer than a month. Getting approved takes time. Having your new lender pay off the old debts takes time. Waiting for your credit report to show the old loans as paid off takes time. If you are going to refinance your student loans to help your chances at a successful mortgage application, be sure to do it long before applying for the mortgage.

Find the Best Long-Term Rate – If your goal in refinancing is to lower your monthly payments for a mortgage application, opting for a longer repayment term is a smart move. For example, choosing a 20-year loan term will give you significantly lower monthly payments compared to a 10-year term. Though the interest rate might be a bit higher, your monthly payments will be much more affordable. Keep in mind that the companies advertising the lowest rates are usually promoting their shortest-term loans. Focus on the lenders who have the best 20-year refinance rates.

Multiple Refinances – As you plan your strategy, remember that there is nothing wrong with refinancing your student loans multiple times. You might start with a long-term loan to reduce your payments before applying for a mortgage, then refinance again after buying your home to lock in a better interest rate. This approach can be creative way to work within the system, but it does involve some risks. You’re counting on being approved again and lower interest rates being offered in the future.

Mortgage Applications, Student Loans, and Credit Scores

Thus far, we have focused primarily on the DTI because this is typically how student loans make the biggest impact on a mortgage application. However, student loans can also affect credit scores (which can have an effect on mortgage applications). For example, longer credit histories typically help credit scores, and a student loan might be a borrower’s oldest line of credit. Additionally, making on-time payments can improve a credit score, while late payments and other student loan issues can damage it.

The process of refinancing has the ability to either help or hurt your credit score. In the vast majority of cases, the impact on credit score is minimal in either direction. It usually is difficult to predict the exact nature of the score change. Paying off multiple loans and consolidating them into one new loan can lead to an increase in your score. But, if your student loan is one of your oldest accounts, closing it and opening a new one can shorten your credit history and might lower your score a bit.

Refinancing applications can also cause a slight dip in the credit score. Fortunately, credit agencies generally count shopping around as a single application.

For these reasons, it is crucial to make any student loan moves well in advance of your mortgage application. This will ensure that any potential negative impacts are minimal while allowing you to take advantage of the positive consequences.

There are a couple of additional items to be aware of. First, for borrowers with excellent credit scores, the minor variations from the refinance process are unlikely to impact the amount offered or the interest rate on their mortgage. Second, if your lender has mistakenly reported any negative information to the credit agencies, be sure to get this adverse reporting fixed as soon as possible.

Working with Mortgage Brokers and Lenders

Because credit scores can be complicated, it is often a good idea to consult an expert. Mortgage brokers earn their living by helping people find mortgages. Some are better than others, and some are more reputable than others. Working with someone who is not only skilled but also trustworthy can greatly improve your chances of getting approved.

A knowledgeable mortgage expert can assist most student loan borrowers in understanding their financial position and what steps they might need to take to improve their chances of mortgage approval. They can help mortgage applicants answer the following questions:

  • What size mortgage will I qualify for?
  • Is my credit score going to be an issue?
  • What ways can I improve my DTI?
  • What price range should I be considering?

Where the mortgage brokers and lenders can fall short is in helping borrowers make a responsible decision. Determining how big a mortgage someone can qualify for is one thing, but determining whether it is a good idea is another matter. Just because you can qualify for the mortgage doesn’t mean you can afford it or that it’s a good idea. Brokers get paid when new loans are created, so they don’t have an incentive to tell you when a mortgage is a bad idea.

Another area where mortgage experts can often lack expertise is with student loans. Many mortgage lenders don’t fully understand how federal repayment plans work. This knowledge deficiency can make the underwriting process more difficult.

Underwriting Issues – Can I Use IBR, PAYE, or SAVE Payments?

Mortgage underwriting is the process by which lenders evaluate an applicant’s finances to determine whether or not they should offer a mortgage loan. This process also determines the interest rate and loan size.

Borrowers who use income-driven repayment plans for their federal student loans have historically found their plans to be a hurdle in qualifying for a mortgage. In the past, lenders would not accept income-driven payments for DTI calculations because the borrower’s payments could increase. Therefore, they concluded that the payments weren’t an accurate representation of that monthly expense.

Student loan borrowers and advocates argued that the only reason these payments would go up is if the borrower was earning more money. Borrowers making more money would be in a better position to repay their mortgage.

Nonetheless, for years, borrowers weren’t able to use income-driven payments for DTI calculations. Instead, lenders would replace the actual monthly payment with 1% of the loan balance. For borrowers with enormous debts, this would often shatter the DTI and lead to application rejections.

The good news is that most lenders are becoming more knowledgeable on this issue.

Mortgage giants like Freddie Mac and Fannie Mae have finally seen the light. They have updated their approach and are now more open to considering payments under income-driven repayment plans (like IBR, PAYE, or SAVE) when calculating your DTI. This new approach has also been adopted by many smaller lenders, like local credit unions and regional banks. However, not every lender is on board with including these types of payments into DTI calculations. For this reason, it is critical to communicate with your lender to determine how they evaluate income-driven payments on student loan applications.

To safeguard your home buying journey, we recommend applying for a mortgage with multiple lenders. This way, if one lender gets cold feet about your student debt close to the final decision, you’ll have another option already in progress.

Sherpa Tip: For many borrowers, the new SAVE plan is the best plan to use if you are going to apply for a mortgage.

Co-Signer Issues on Mortgage Applications

Being a co-signer on a student loan can also impact your mortgage application. Co-signed student loans appear on your credit report, along with monthly payments. Consequently, most lenders include the co-signed loan payment in DTI calculations, even if you aren’t the one who makes the student loan payments.

Many lenders will remove the co-signed loan from the DTI calculation if you can show that the student loan borrower has been making payments independently for a while, usually 12 to 24 months. However, since many mortgage applications are initially reviewed by a computer algorithm, co-signed loans could still trigger a rejection, regardless of the primary borrower’s payment history.

Things get further complicated for co-signers of borrowers still in school. We have heard of lenders going so far as to initiate a three-way call between the mortgage applicant, the mortgage company, and the student loan company. The mortgage company essentially asks the student loan company to determine the maximum potential payment once the borrower graduates and enters repayment. This maximum payment is then used in the DTI calculations, potentially affecting the co-signer’s mortgage application significantly.

Accordingly, if you’re thinking about buying a house in the future, you should probably avoid co-signing on student loans if possible.

Next Steps to Fix Student Loan Debt on Your Mortgage Application and Buy a Home

The following steps could help you qualify for a home loan. Because student loan changes can take months to be reflected in your credit report, you should plan ahead.

Visit the Federal Repayment Simulator – Review the repayment plan options to get the lowest monthly payment.

Refinance Private Loans – The best way to improve debt-to-income ratios for private loan debt is to pick a 20-year loan at the lowest interest rate possible. Borrowers can probably refinance again after securing a mortgage.

Try to get a Co-Signer Release – If you have co-signed a student loan for someone else, getting removed from that loan should be a priority.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

12 thoughts on “Student Loans and Mortgages: The Impacts and Strategies for Homebuyers”

  1. This is a great post, full of great information that I didn’t expect to see while browsing your site!! Student loan debt and monthly payment information is always such an unfortunate “surprise” for so many of my clients. I had so many borrowers falsely believe that because their loans were on pause or are in forbearance, they felt we shouldn’t be counting a monthly payment on that debt.

    It is absolutely correct that regardless of a $0.00 payment showing, due to a government or personal forbearance, if there isn’t a payment plan in process, lenders must use a 1% payment (student loan balance) on conventional loans and .5% payment on government loans. I had to explain that is still a debt we have to account for because monthly payments will resume. If they had proof of loan forgiveness prior to closing, we could eliminate it; other than that, I needed proof of what their payments would be as far out as 12 months after closing. Some banks may differ. Some did not know anything about how to get into a repayment plan or how to obtain a letter reflecting their payment dates, which some loan services have as an option to print when logging in now.

    For residents and doctors, we could use the simulator payment, but it was still a process to get the information required for underwriting. I knew it all by heart so it wasn’t hard for me. At the very beginning of the process — at pre-approval stage when I pulled credit, if I saw student loans, I would call them and be sure to get accurate payment info, answer all their questions, and explain all that would be needed to get underwriter approval. I never wanted to send a client out with a pre-approval letter, have them go under contract, and then come back and not be approved. So a lot of emphasis was put on the truthfulness of their application and information they provided.

    And just as you stated, I had a few issues with cosigners, who do not make the payments at all on a debt for the reasons you stated above. There is definitely a lot to consider when applying for a mortgage. This was great!! 🙂 I just resigned my positions as a mortgage loan officer a week ago.

  2. I’m going through the underwriting process now and my DTI is .05% over what it should be. Currently, I have $60,000 in student loans. They are calculating them using the 1% rule. I called Nelnet and got a letter from them showing after the Covid forbearance my payments are going back to the $329 standard payment. Do you think the underwriters will accept this letter so my DTI can be lower?

  3. Oops. I just read your article on the problem with IBR being $0 and also the new Covid rules for student loans. Wondering what will happen with my refi. loan, now, that is already in progress, and I have already paid for the $700. appraisal fee. I wonder what my options will be if this becomes an issue.

    • Hi EJ,

      I saw both of your comments, so I’ll respond to this one.

      My first thought is that your lender shouldn’t have scheduled an appraisal if there was an issue with your student loans or DTI. If they later reject you based upon information that was available before they scheduled the appraisal, I’d ask for my money back as this was their error.

      Generally speaking, if the number is $0, they will use 1% of the loan balance as a placeholder in the DTI calculations, but some are using even lower numbers. Sadly, most underwriters follow a strict procedure and there isn’t really much you can do to change a rejection into an approval.

  4. As a recent graduate, I had very little idea about student loan confliction with mortgage loan. In your article, you have wrote in details which will be beneficial to me before buying house in future. I am so thankful to you for your helpful article.

  5. Michael – will an underwriter use the IBR amount for the mortgage amount approval if at the end of the 20 years (or 25 for grad students) the balance of the IBR will be written off? I’d heard that mortgage lenders wouldn’t consider the IBR unless it’s paid off at the end of the 20 or 25 years. Otherwise they would use the 1% rule. Thank you!


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