There is a lot of paperwork required when getting a mortgage, and many factors involved in qualifying for a loan. One commonly asked home loan question is: “How will my student loans affect my ability to get a mortgage?” Below, we’ve outlined some of the negative and positive effects that student loans can have on your loan application process. If you have any specific questions about your loans and how they will affect your ability to get a mortgage, contact us .
Student loans can have both a negative and positive affect on your ability to get a mortgage based on your credit score and overall debt to income ratio. Your credit score is an important factor that lenders look at when reviewing your loan application. It can affect the loan program that you will qualify for, and it can affect the interest rate that you get for your loan.
How Student Loans Affect Credit Scores
Student loans can have a positive effect on your credit score if you make the payments on time. Payment history has a 35% impact on your overall FICO score, and your payment history becomes more established with the more on-time payments that you make. Your payment history is affected by credit card payments, car payments, and student loan payments.
Student loans can also have a positive effect on your FICO score by expanding your credit account mix. Lenders like to see that borrowers can handle different types of credit. If someone has a credit card, auto loan, and a student loan, they will have a stronger credit mix than someone who only has a credit card. According to Credit Sesame, credit account mix only has a 10% impact on your overall FICO score, but it is still an important factor.
Your credit score can also be negatively affected by student loans if payments are not made on time. In addition to payment history, a credit inquiry can have a slight negative impact on your credit score in the first year of getting your student loan. A hard credit inquiry is when a creditor or lender runs your credit to see your eligibility for a loan, lease agreement, or new credit account. If you have multiple hard credit inquiries within a year, your credit can be negatively impacted. Ths means, it is not wise to apply for a student loan, car loan, and mortgage all in one year. Those hard credit inquiries will likely have a noticeably negative affect on your overall FICO score.
How Student Loans Affect a Debt to (DTI) Income Ratio
Your student loan will have a more vital impact on your ability to get a mortgage based on your overall debt to income ratio. A debt to income ratio is the amount of monthly debt payments you have (car payment, credit card payment, student loan payment) compared to the amount of income you make monthly.
According to the CFPB, for FHA loans the highest allowable debt to income ratio is 43%. This means that if you make $3000 per month, the most that you can spend on debt payments (including your new suggested mortgage payment) is $1290. If you have a $300 car payment, a $200 student loan payment, and a $25 minimum credit card payment, your total monthly debt payments will be $525. That means your new mortgage payment must be less than $765 to stay under the 43% DTI ratio.
[.43(Total monthly income) – Total debt payments = allowable home loan debt under the FHA loan.]
($1290 – $525 = $765)
It is important to look at all of your monthly expenses in addition to looking at your debt to income ratio. 43% might be the benchmark, but that might still be high if you have other non-debt related expenses that you need to pay each month. It is very important to create a budget that makes sense for you and your family. Just because you can borrow a certain amount of money, doesn’t mean you should borrow that much. If you think your DTI is more than 43%, you may qualify for a huge variety of NON-QM products.
All in all, student loans will not necessarily have a negative impact on your ability to buy a home. As long as payments are made on time and your overall debt to income ratio is reasonable, you will likely be able to qualify for a mortgage. If you would like to learn about loan programs that you may qualify for with student loans, contact us!