How Student Loans Affect the Homebuying Process

Whether you’re a recent college graduate considering homeownership or a long-time renter who’s been whittling away at your student debt, there’s a lot to consider in regard to your student loans and how they may affect your ability to buy real estate.

How Student Loans Affect Your Credit

When you take out student loans, your loan balance (or the amount of student loans you have) doesn’t affect your credit score. Instead, what causes your score to go up or down is whether you’re making payments on time or missing payments.

If you’ve missed any payments, now is the time to create a budget to ensure that you make regular payments on your school loan. Keep in mind that it can take up to seven years for that missed payment to come off of your credit report.

Student Loans and Buying a Home

When you apply for a mortgage loan, your debt-to-income (DTI) ratio is one of the main factors that lenders take into consideration. DTI compares your total recurring monthly debt with your total monthly income. Making timely payments on your student loans strengthens your FICO® score, which makes you more likely to be approved for your mortgage loan.

In order to calculate your DTI, add up your recurring monthly debt and divide it by your gross monthly income.

In general, lenders want to see a DTI of 43% or less before they approve a loan. However, some lenders will look for a DTI as low as 36% before they consider lending.

More than half of non-homeowners say their DTI keeps them from qualifying for a mortgage. To keep this from happening from you, create a financial plan that allows you to chip away at your loans at a pace you can handle. You may surprise yourself at how much of a dent you can make in your loans by making regular payments.

By understanding the way student loans affect credit, you can act on that knowledge and work toward getting approved for a mortgage loan, even with student debt on your credit report.

To help young professionals, including those burdened by student loan debt, better understand the homebuying process, Lennar has launched new workshop series called Make Your Move. Click here to learn more about this innovative program and RSVP for the next event today!

Anna Young