Personal finance

Student debt can make buying a home feel impossible. Here are your options

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Half of people who haven’t yet purchased a home point to their student debt as a reason for the delay.

That’s the finding from a new report by the National Association of Realtors, which partnered with Morning Consult to conduct an online poll in June of 1,995 student loan borrowers.

Millennials were the most likely (60%) to say their student debt was making them put off homeownership, although more than a third of baby boomers said the same.

“Housing affordability is worsening, leaving future home buyers with student debt at a severe disadvantage,” said Charlie Oppler, president of the National Association of Realtors.

Outstanding student loan debt in the U.S. has surpassed $1.7 trillion and burdens Americans more than credit card and auto debt. Around a third of borrowers are in delinquency or default.

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Your education loans will affect your eligibility for a mortgage in two ways, said Mark Kantrowitz, a higher education expert.

For one, your payment history on the loans will impact your credit score, he said. If you fall behind on your monthly bills to your servicer, expect your score to drop.

“This can reduce your likelihood of loan approval and increase the interest rate you pay,” Kantrowitz said.

Despite the challenges of student debt, it’s still possible for borrowers to become homeowners, experts say.

As you save up for a down payment, or get ready to apply for a mortgage, staying current on your student loans will be crucial.

Housing affordability is worsening, leaving future home buyers with student debt at a severe disadvantage.
Charlie Oppler
president of the National Association of Realtors

Your monthly payment will also be factored into your debt-to-income ratio, which lenders use to measure your ability to keep up with mortgage payments.

“There are limits on the percentage of your income that can be devoted to repaying all debts, including student loans,” Kantrowitz said.

If you’re hoping to apply for a mortgage soon, you may want to consider switching to a plan that lowers your monthly bill. Income-driven repayment plans, for example, often do that. (Fannie Mae, the federal mortgage giant, made it easier for student loan borrowers to get a mortgage in 2017, by allowing lenders to consider the lower payments on these plans.)

Kantrowitz recommends borrowers change their repayment plan at least a year before they apply for a mortgage.

Fortunately, owning a house will not impact your monthly student loan payments on an income-driven repayment plan, said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that helps student loan borrowers with free advice and dispute resolution.

That’s because the plans, Mayotte said, “are based only on income and family size, not on assets or other debts.”

Various government agencies that back mortgages, from the U.S. Department of Veterans Affairs to the U.S. Department of Agriculture, will use different formulas to calculate how much of a burden your student debt poses.

“It might be helpful to use a mortgage broker who works with all of the different government programs,” Kantrowitz said.

On the other side of the balance sheet, if you plan to soon buy a house, it’s a great time to try to lift your income, “especially if you think you deserve a raise or promotion,” said Elaine Griffin Rubin, senior contributor and communications specialist at Edvisors. Others may look at taking a second job.

Avoid deferments or forbearances in your lead-up to homeownership, experts say.

While they’ll bring your monthly payment down to zero, they signal financial hardship to lenders, Kantrowitz said.

One important exception, he noted, is the current option to pause payments without interest accruing that the U.S. Department of Education has offered borrowers since the start of the pandemic. (That break will end in January.)

“The eligible federal student loans are reported as current to the three national credit reporting bureaus, so there shouldn’t be an impact on applying for a mortgage,” he said.

If you’ve defaulted or fallen behind on your student loans, getting a mortgage will be more difficult, Kantrowitz said.

Such borrowers may want to see if a parent can buy the house.

If the property is bought through a trust, the child will inherit the house when the parent dies. (There are also, of course, a number of ways to climb out of the red and become current on your loan again.)

Another option: You can apply for a mortgage with another person. That will show a higher income, and you’ll have another credit score to lean on too.

“It may be worth it to borrow the mortgage with your spouse,” Griffin Rubin said. “If you’re not married, maybe your significant other, family member or friend may be a choice for you.”

In the end, if you’re having a hard time finding a bank that will work with you, “the answer will be clear,” Griffin Rubin said. “Focus on paying down debts.”

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