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Getting a mortgage and buying a home is one of the biggest milestones in adult life. It’s no wonder most people still hope they’ll be able to afford their own home someday. But with more and more concern over the rising rate of student debt in the country, many people are wondering how student loans will affect their ability to get a mortgage.
There is good news.
Having student loans doesn’t mean you won’t be able to get a mortgage, or even that you’ll have to wait longer to get a mortgage.
Here’s what you need to know about how student loans impact your eligibility for a good mortgage.
How Student Loans Affect Getting A Mortgage
The truth is that any major debt can affect getting a mortgage, not just student loans. Your loans are less important than the total picture of your financial health.
So, someone with relatively high student loans can still get a mortgage if they have the income to cover both debts.
But someone with few student loans might not qualify for a mortgage at all if they are struggling financially.
Here’s the breakdown of the major impacts student loans have on getting a mortgage, both good and bad, and how you can improve your financial standing before applying for a mortgage.
Student Loans Impact Your Credit Score
One of the biggest impacts of having student loans when you’re looking to get a mortgage is that your loans impact your credit score.
We’ll talk about how student loans impact your debt-to-income ratio in a moment, so for now, we’re going to pretend that your student loans only matter on your credit because of your payment history.
Payment history accounts for more than 30% of what credit scorers are looking at when they give you a credit score. A good payment history can boost your score a lot, even if other credit markers don’t look very good.
That boost is because payment history proves how well you’re managing your debts and obligations, regardless of your income or financial standing.
So having student loans and paying on them regularly may actually give you a good payment history and a good credit score. The better your credit score the easier it is to get a mortgage.
But, even one missed student loan payment can have a serious impact on your credit score. So it may be harder to get a mortgage if you’ve missed a student loan payment in the last several years.
Student Loans Impact Your Savings
Another important impact is your ability to save. One thing many banks and lenders look at when they are deciding what kind of mortgage you qualify for is how much you have put away in savings. The more savings you have, and the bigger down payment you can afford, the more likely it is you’ll be able to get a mortgage.
But, paying student loans often takes a lot of money away from possible savings, making it harder to get down payment money together, and harder to prove that you can afford a mortgage.
The good news is that you may be able to change your student loan repayment plan to get a lower monthly payment. That way you can save a little faster and get your mortgage sooner.
Either way though, student loans make the savings part of getting a mortgage harder.
Student Loans Add To Your Debt To Income Ratio
The last big thing to consider is your debt-to-income ratio. The more debt you have, and the less income, the less likely you are to get a mortgage.
Since student loans are the biggest debt, many people have before they buy a home, this is an incredibly important number.
Banks look at your debt-to-income ratio to determine how safe it is to lend to you, or how likely you are to default on your mortgage payments.
The best thing you can do is pay down as much of your student debt as possible before applying for your mortgage. That way your debt-to-income ratio is lower.
It’s also possible to wait until you get a promotion or switch to a higher-paid job so that your income improves even if your debt is similar.
Another option is to pay off other debts before applying for a mortgage. Paying off credit card debt or car loans can help lower your debt-to-income ratio, and also make you look more responsible to banks.
While this isn’t an area most people have much control over, understanding debt to income ratios can help you get a mortgage sooner, student loans or no.