Home Loans For College Students: A Guide To Student Loans and Mortgages

Are you a college student who is interested in purchasing a home? You may be dealing with looming student loan debt while working part-time or not at all, wondering if it’s even a possibility to own a home in your current situation. Luckily, it’s still possible to own a home even as a current college student. All you have to do is qualify for certain mortgage programs available at the state and national level.

As you read on, you’ll learn about the programs designed for borrowers like you, as well as how to successfully qualify for a mortgage once the student loan payments kick in.

If you want to buy a house as a current student or a former student who’s dealing with student loans, consider the programs available to you based on your debt-to-income (DTI) ratio, credit score and funds available for a down payment.

You may not qualify for a conventional loan if you have a DTI ratio higher than 50%. A conventional loan is a mortgage that follows guidelines set by Fannie Mae and Freddie Mac, government-sponsored agencies which standardize mortgage lending in the U.S.

However, you may still be able to buy a home with a government-backed loan. These loans are insured by the federal government, making them less risky against a loss from a default. This allows mortgage lenders to issue loans to borrowers with lower DTI ratios.

Let’s take a look at some programs available that may make it easier to qualify for a home loan as a college student.

FHA Loan

FHA loans are backed by the Federal Housing Administration and have lower requirements for loan approval. Some of the requirements include:

• DTI ratio: FHA loans require a maximum DTI ratio of 57% in many cases.

• Credit score: You’ll need a credit score of at least 580 to qualify for an FHA loan.

Additionally, with an FHA loan, you may be able to have 2 years of your higher education considered as employment history to help you qualify.

VA Loan

If you’ve served in the armed forces or National Guard, you may qualify for a VA loan from the Department of Veterans Affairs (VA). Some of the requirements include:

• DTI ratio: You can buy a home with a DTI ratio of up to 60% with a VA loan.

• Credit score: You’ll need a credit score of at least 580 to qualify for a VA loan.

Before you apply for a VA home loan, make sure you meet service requirements.

Fannie Mae Loan Solutions

Fannie Mae also has a variety of policies in place to assist borrowers who have student debt but want to buy a home. These opportunities include:

• Student Loan Cash-Out Refinance: Homeowners are offered flexibility to pay off high interest rate student debt while potentially refinancing to a lower interest rate on their mortgage.

• Debt Paid By Others: In some instances, it may be easier for borrowers to qualify for a home loan if their non-mortgage debt, including credit cards, auto loans and student loans paid by someone else are excluded from their DTI ratio.

• Student Debt Payment Calculation In some cases, lenders are allowed to accept student loan payment information on credit reports which can make it easier for them to qualify. This

State Programs

In addition to government-backed mortgage options, certain states have special programs for graduates purchasing homes within the university's areas. These programs provide assistance and low interest rates on home loans. Check for available programs in your state through your state housing authority. Here are a few examples:

• Maryland: The Maryland Mortgage Program provides a discounted interest rate and down payment assistance for students with at least $25,000 in student loan debt.

• Michigan: The MI Home Loan program provides discounted interest rates for qualifying graduates and first time home buyers purchasing property in certain cities.

• Ohio: The Grants for Grads Program provides down payment assistance, plus a grant for graduates who qualify.

• Rhode Island: The Ocean State Grad Grant Program provides down payment assistance for those who qualify.

To understand the effects of student loan debt on the ability to get a mortgage, you have to recognize the nuances of the loan process.

The first step to getting a mortgage is preapproval. Preapproval documents serve two primary purposes: establishing the loan amount that you qualify for and determining whether you’re a good candidate for a mortgage. Verified Approval Letters¹ also give prospective buyers a competitive edge against other buyers since they can help verify credit, income and asset information up front.

Your preapproval letter estimates your monthly payment which helps you shop for homes within your budget. Lenders determine your preapproval amount by collecting information such as your credit history and current student loan balance.

Underwriters will look at your:

• Current debt

• Credit score

• Income

• Unusual activity in your recent bank account transactions

• Other assets you have

Lenders will always look at your debt-to-income (DTI) ratio when they consider you for a loan. Your DTI ratio is the percentage of your monthly income that goes toward debt, like student loans. You may have trouble getting a mortgage if you have a high DTI ratio.

Student Loans And Debt-To-Income Ratio

Though the specific DTI ratio you need for a mortgage depends on your loan type, most lenders like to see DTI ratios of 50% or lower. You may need to work on reducing your debt before you buy a home if your DTI ratio is higher than 50%.

To calculate your current DTI, first add all your regular, recurring and required payments. Some payments you should include in your DTI calculation include:

• Student loan payments

• Your monthly mortgage payment or rent

• Your homeowners insurance or renters insurance premium

• Any monthly homeowners association fees you pay on your current property

• Minimum credit card payments

• Auto loan payments

• Personal loan payments

• Court-ordered back taxes, alimony or child support payments

Leave out expenses that vary from month to month. Some expenses that you shouldn’t include in your DTI ratio calculation include:

• Entertainment, food and clothing costs

• Utility bills

• Transportation costs

• Savings account contributions

• 401(k) or IRA account contributions

• Health insurance expenses

Remember to only include the minimum required payment you need to make each month. If you have $20,000 in student loan debt but you only have a minimum required payment of $100 a month, only include $100 in your DTI ratio calculation.

Add all your monthly recurring expenses, then divide the number you get by your total pre-tax monthly income. If someone else is applying for the loan with you, include their income and debts in your calculation as well. Multiply the number you get by 100 to get your DTI ratio as a percentage. Remember, most lenders like to see DTI ratios of 50% or lower.

Student Loans And Credit Scores

Lenders consider credit score when looking at approval of your mortgage. While the required score varies based on loan type, the recommended credit score for a conventional loan is 620. Requirements for certain government-backed loans, like FHA loans, are slightly lower with a recommended score of 580.

Student loans don’t hurt your credit score by themselves, and actually have the potential to boost your credit mix and history, if handled correctly. The biggest issue with student loans and credit scores when applying for a mortgage is on-time payments made in full. Late payments over 30 days and loans in collections can appear on your credit report, which lenders consider for preapproval.

If you’re thinking about purchasing a home, but your credit score is low, consider taking actions to improve your score before applying for a mortgage.

Student Loans And Down Payments

While your down payment isn’t a direct factor for preapproval, it’s important to consider the amount you’re able to put down when budgeting for a home purchase.

Conventional loans require at least 20% down to avoid paying private mortgage insurance (PMI) on top of your monthly payments. Mortgage insurance can add an additional .1% to 2% of the loan.

Alternatively, certain government-backed loans like FHA loans only require 3.5% down, but require mortgage insurance and have a higher interest rate.

Any prospective home buyer with student debt should realistically ask themselves, “Should I pay off student loans before buying a house?”

While there’s no cut-and-dried answer, consider each of the factors below before applying for a home loan.

DTI Ratio

Look at your DTI ratio. You can still buy a home with student debt if you have a solid, reliable income and a handle on your payments. However, unreliable income or debt payments may make up a large amount of your total monthly budget, so you may want to consider paying down student loans or other debts before buying a house.

Savings

Look at other areas of your finances before you consider homeownership. If your student loan payment is standing in the way of retirement contributions or creating an emergency fund, wait to buy a home until you pay down more of your debt.

Interest Rate

Consider the interest rates on your debt. If you have a high interest rate on your student loans, your loans will cost more over time. Paying down more of your higher-interest loans before you invest in a home allows you to reduce what you pay in interest.

Look at your repayment plan on existing debts and compare your monthly payments to your accruing interest. If your payments are low but you aren’t paying off enough to cover your accruing interest every month, you’re going deeper into debt. In this situation, you should pay more than your minimum and focus on paying off existing loans first before taking on more debt with a mortgage.

If you have an emergency fund, your DTI is low, you have a solid repayment plan and you’re contributing to your retirement, now might be the right time to invest in a home.

It’s possible to buy a house with student loan debt, but it’s important to keep in mind financial factors before applying for a mortgage.

You don’t have to be 100% debt-free to buy a home or qualify for a mortgage. However, lenders need to know that you have enough money to make your monthly payments. The more debt you have, the more likely you are to fall behind on your payments.

Set on buying a home even though you have student loans? Here are a few steps that you can take to improve your chances of qualifying.

Make Payments Towards Other Debts

Do you have some lingering credit card debt? Or maybe you’re only a couple hundred dollars away from paying off your auto loan. If it’s not currently in your budget to pay extra towards your student loans, paying your other debts down or off will help your mortgage approval odds as you lower your DTI ratio.

Increase Your Cash Intake

Another way to increase your chances of mortgage approval is to bring in additional, recurring income, whether it be by taking on extra shifts at work or starting a side hustle that brings in a few extra hundred dollars a month. Every little bit counts, but it’s important to note that lenders typically want to see a minimum of a 2-year employment history for each of your income streams.

Consider A Co-Signer

If you have a spouse or parent who is willing to co-sign for a house, having that dual income, additional assets and additional good credit profile can help you qualify for a loan. Just be sure that your co-signer is aware that they’re liable for any missed payments.

Look For Alumni Deals

Certain lenders may offer deals for alumni at certain schools. The deals could include reduction of the mortgage origination fee or closing costs. University credit unions are typically open to both current students and alumni, so they might offer attractive mortgage terms.

Whether you’re a current college student or you’re about to graduate with some student debt, you’ll want to ensure your financial situation is stable before you buy a home. Scrutinize your repayment plan, existing assets for a down payment, your emergency funds and your retirement finances before shopping for a loan. Before applying for a home loan, consider increasing your income or lowering your debt.

Once you feel like you’re in a good place with your finances, you can get a head start on the homebuying process. Start your mortgage application with the Home Loan Experts at Rocket Mortgage^®.

 ¹ Participation in the Verified Approval program is based on an underwriter's comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage's control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. This offer is not valid on jumbo loans. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.