Qualifying for a Mortgage with Student Loan Debt

Qualifying for a mortgage loan requires you to meet certain financial standards. Often known as the four C’s, there are four core components that lenders will evaluate when determining whether they will make a loan. If your student loan payments have recently resumed, you may be wondering: how will the payments affect my ability to buy a home?

Buying a home can require months to years of preplanning to find yourself financially ready, and for many, the U.S. Department of Education’s three-year relief for student loans helped them weather an uncertain time and financially prepare for the future. But as of October 2023, federal student loan repayments have resumed.

As of the first quarter of 2023, nearly 44 million people carry a collective $1.6 trillion in student loan debt. Repaying your student loans on time and in full each month is a good practice, and although it decreases the amount you have available to spend and save, simply having student loan debt doesn’t put you as far from homeownership as you may think.   

Here’s how your student loan debt affects your ability to get a mortgage.

Student Loans and Credit

Your credit plays an important role in determining your eligibility for a mortgage. When you build and maintain strong credit, lenders have greater confidence when qualifying you for a mortgage because they see you’ve paid back your loans as agreed and used your credit wisely. Many lenders have minimum credit score requirements, and your credit score often affects the interest rate you receive.

There are several factors that influence your credit, including:

• The total amount you’ve borrowed (which includes outstanding student loan debt).
• The types of credit used (such as student loans, car loans, personal loans or credit cards).

Carrying student loan debt does not automatically affect your credit negatively. In fact, you may have used the debt to finance a degree that raises your income, thereby increasing your borrowing limit. Instead, by adopting good credit habits and keeping your credit utilization ratio — the percentage of your total borrowing limit you use — at or below 10%, you can increase your credit score.

Student Loans and Your Capacity to Repay

In addition to your credit, lenders will review your capacity to pay back a mortgage by reviewing your income, employment history, savings, and other monthly debt payments or obligations. By attaining this full picture of your expenses, lenders make sure you have the financial means to take on a mortgage.

Among the monthly debts or obligations reviewed are student loans. The higher the percentage of your monthly income you pay toward student loan debt (among other debt), the lower the capacity you have to take on more debt. Lenders will typically determine this by looking at your debt-to-income (DTI) ratio.

To calculate your DTI, divide your total recurring monthly debt (your rent and any auto loan or credit card payments) by your gross monthly income (the total amount you make each month before taxes, withholdings and expenses). 

Depending on the number of monthly payments remaining, and whether your loan is in a state of forbearance or forgiveness, you may be able to exclude your student loan debt from your DTI ratio. Speak with your lender or a HUD-certified housing counselor to learn more.

If your DTI ratio is keeping you from being ready for a mortgage, you can work toward reducing your debt with the help of education tools and resources, including Freddie Mac's CreditSmart^®.