Yes. Let me just start there, because I hear this question constantly, usually from someone who has already decided the answer is no.
Student loans don't disqualify you from buying a home. What they do is affect how much house you qualify for, and the way lenders count them can make a bigger difference than most people realize. So, let me walk through how it works and what you can do about it.
It all comes down to DTI
When you apply for a mortgage, one of the biggest things a lender looks at is your debt-to-income ratio (DTI), which is your total monthly debt payments divided by your gross monthly income. Your new house payment, your car loan, your credit card minimums, and your student loan payment all go into that calculation.
Most loan programs top out somewhere around 45% to 50% DTI, depending on the rest of your file. So every dollar of student loan payment that counts against you is a dollar that can't go toward a house payment.
How student loans get counted
Here's where it gets tricky. The payment the lender uses isn't always the payment you actually make. Each loan program has its own rules:
- If you have an actual monthly payment showing (on a standard plan or an income-driven repayment plan), lenders will generally use that payment.
- If your payment is $0 or your loans are deferred or in forbearance, the rules vary a lot. Depending on the program, the lender may be able to use your documented $0 income-driven payment, or they may have to plug in a percentage of your balance instead: 0.5% for FHA and Freddie Mac loans, 1% in some conventional situations, and 5% divided by 12 for VA loans (unless the loans are deferred at least 12 months past closing).
On a $60,000 balance, that's the difference between counting $0, $300, or $600 a month against you. That's a huge range.
Let's see what that does to your buying power
Say you make $90,000 a year ($7,500 a month), you have a $400 car payment, and your lender caps your DTI at 45%. That leaves room for about $2,975 a month in total debts beyond your car payment. Here's what's left for a house payment depending on how your student loans get counted:
- Student loan payment counted as $0: room left for a house payment is about $2,975.
- An actual income-driven payment of $180: about $2,795.
- 0.5% of balance, $300: about $2,675.
- 1% of balance, $600: about $2,375.
That's a $600 a month swing in what you can spend on housing, which at today's rates is roughly $85,000 or more in purchase price. Same person, same income, same loans, just a different calculation.
What you can actually do about it
- Get on an income-driven repayment plan (and get the paperwork). If your income-driven payment is lower than 0.5% or 1% of your balance, a documented income-driven payment often works in your favor. The key word is documented. Your lender will want a statement from your servicer showing the payment amount.
- If you're in forbearance, find out what your payment would be. With all the changes to federal repayment plans over the last couple of years, a lot of borrowers are in limbo with a $0 payment on their credit report. Your servicer can usually tell you what your scheduled payment would be, and that number may be better than the percentage-of-balance calculation.
- Choose the right loan program. Because each program counts student loans differently, the best program for you might not be the one you'd expect. This is one of the most valuable things I do for buyers with student debt, I run their numbers across different programs to see which one counts their loans most favorably.
- Pay down other debts first. If you're close to the line, knocking out a small credit card balance or a car loan with only a few payments left can free up more room than you'd think.
- Don't stop paying to 'save up.' Late payments on student loans will hurt your credit score, and that'll cost you more than whatever you saved.
Bottom line
Student loans are a factor, not a deal breaker. The way they're counted can swing your buying power by tens of thousands of dollars, so it's worth having someone who knows the rules look at your specific situation before you assume you can't buy.
Send me your servicer statement and I'll tell you exactly how your loans would be counted on each program and what that means for your price range.
Example is for illustration only and is not a loan approval or quote. Maximum DTI and student loan treatment vary by loan program, automated underwriting findings, and the borrower's full credit profile. Guidelines are subject to change.
Want this run on your actual numbers?
Everything above is a worked example. Give me your real figures and I'll tell you what it looks like for you, with no application and no credit pull.