Yes! You can get a mortgage even if you’re paying off student loans.

Having student loans doesn’t mean buying a home is out of reach. Here’s what you need to know about financing a house when you have student loan debt.

Understand debt-to-income ratio

When approving loans, lenders look at an applicant’s debt-to-income ratio (DTI). This number shows how much debt a borrower has in relation to their income. The formula to calculate DTI ratio is:

DTI Ratio = (Total Monthly Debt ÷ Total Gross Monthly Income) x 100

Gross monthly income is what’s earned before taxes are taken out.

In addition to student loans, auto loans and credit card debt, other financial obligations included in the DTI ratio calculations are child and spousal support, court-ordered payments and payment plans for back taxes.

Let’s look at the DTI ratio for a hypothetical homebuyer, Jessica, who has student loans and a couple other debts. Jessica has these monthly payments:

Student loan $350

Auto loan       $450

Credit card    $175

Monthly total $975

Jessica’s monthly income before taxes is $6,000. When we divide $975 by $6,000, then multiply the result by 100 we see Jessica’s DTI ratio is 16.25% This means just over 16% of Jessica’s income goes toward debt. (Note: We didn’t include Jessica’s rent because we’re just looking at her DTI in relation to buying a home. If Jessica was buying a second car or getting a personal loan, rent would be included in her DTI ratio.)

A DTI ratio of 35% or less is generally considered good, so Jessica would likely be approved for a mortgage. In her case, she could take on an additional $1,125 in debt and stay within a 35% DTI ratio. Practically speaking, Jessica could afford a monthly house payment including taxes and insurance of $1,125.

When borrowers apply for a home mortgage with a co-signer both parties’ debt and income are factored into the DTI ratio.

When student loans may not affect one’s ability to get home loan

In certain situations, student loan debt may not be factored into a homebuyers DTI. This includes:

• When the student loan was used to become a doctor, dentist or veterinarian. If this applies to you, check out our Advanced Medical Mortgages.
• When your student loan is being paid off by someone else and you have documentation of timely payments for the last year.
• When student loan payments are deferred for at least a year beyond the home loan’s closing date.
• When student loans have been forgiven or discharged.

Mortgage pre-approval lets you make a home purchase offer with confidence

If you have student loans or any other debt, there’s no need to guess at how much you can borrow for a home. Homebuyers who get mortgage pre-approval before making an offer know exactly how much they can afford. And, when a pre-approval letter accompanies a home purchase offer, home sellers can feel confident that if they accept the offer, the deal will go through.

Special mortgage programs make your money go further

Even when you reduce your debt, boost your credit score and have steady income it can still be challenging to buy a home. However, specialty mortgage programs can help folks with student loan debt finance the home of their dreams—like the Advanced Medical Mortgages mentioned above. Other programs include:

• At Your Service Mortgages for teachers, police, firefighters, RNs and more
• Zero-down mortgages
• FHA and VA loan options

Ask one of our Mortgage Loan Officers for details on any of our specialty home financing options. Also, learn about the ins and outs of getting a home loan with our Mortgage Toolkit.

Another resource to explore is the Michigan Homeowner Assistance Fund and related state programs that provide homebuyers with financial assistance.

In Grand Rapids, recipients of Section 8 Housing Choice Vouchers can use their assistance payment for a home mortgage. Low- and moderate-income homebuyers may be eligible for $7,500 through the Grand Rapids Homebuyer Assistance Fund.

Habitat for Humanity helps people in many communities, including Kalamazoo, build and buy affordable homes.

In Lansing, the Down Payment Assistance program provides up to $14,999 for income-eligible households.

 

Approval and rate may vary based on credit history, term and security offered. Other restrictions and fees may apply. Loan programs, rates, terms, and conditions are subject to change at any time without notice.