How to Qualify for a Mortgage With Student Loan Debt

NEW YORK, March 31, 2022 (Newswire.com) - iQuanti: Every year, student loan debt seems to set a new all-time high — with millions of young college graduates in debt tens of thousands of dollars before they even start their careers. With so much student loan debt, it may be hard to imagine when you might be able to own your first home. According to NAR, more than 50% of home buyers under the age of 36 said that student debt delayed their home buying.

However, you might be overthinking the challenge. Even with student loan obligations outstanding, not all hope is lost. Student loans don't need to stand in the way of young adults qualifying for a mortgage. Taking the right steps to qualify begins with showing potential lenders you are as creditworthy as possible, starting with an understanding of your DTI ratio.

What is a DTI Ratio?

A DTI or debt-to-income ratio is a number that lenders use to determine if a prospective homeowner might be a borrowing risk. When someone's DTI is too high, there's a higher probability they will default on their loan. Therefore, lenders perform this calculation during the application process to ensure that applicants will be able to confidently make their payments. 

Your DTI ratio compares your gross monthly income against your revolving monthly debt payments. For instance, someone who earns $5,000 before taxes and has $1,500 of monthly debt, would have a DTI ratio of: $1,500 / $5,000 = 0.30 = 30 percent.

Generally, your DTI considers the debts which you're required to pay such as:

• Student loans
• Auto loans
• Minimum credit card payments

Your current rent or estimated mortgage payment will also be used as part of this calculation.

How Does My DTI Ratio Affect Applying for a Mortgage?

Alongside many other factors, mortgage lenders place a heavy amount of emphasis on your DTI ratio. As a general guideline, they like to see borrowers have a DTI that's no higher than 36 percent with a maximum of 28 percent going towards the mortgage itself, although some lenders will go as high as 43 percent.

If your DTI is too high, then your mortgage application may not be approved. That's why you'll want to do everything you can to try to get this number down before starting the application process.

What Can I Do to Qualify for a Mortgage?

The main thing that any lender is going to want to see from a borrower is that they will have the ability to reliably make their payments. Even with student loan debt, here are three things you can do to improve your odds of a successful application. 

Lower your debt payments

Start by focusing on your DTI ratio. The more you can do to get your debt payments down, the lower your DTI ratio will be. 

To get there, consider:

• Switching your federal student loans to an income-based program
• Refinancing your student loans into a single, lower monthly payment

When you refinance student loans, you have the opportunity to restructure your repayment plan as well as potentially lower your interest rate. Depending on your existing loans, you could save money on your monthly payments as well as on your total loan repayment. Additional savings might be available for borrowers who have both their student loan and mortgage with the same lending institution.

The benefit of sticking with federal loans is that they come with certain protections, some of which have been highlighted during COVID-19's extended federal loan payment and interest holiday. However, if you have the ability to start tackling your student loans more aggressively and want to start moving towards the next financial milestone, a refinance may be the right choice.

Increase your income

The other side of the DTI ratio equation is your income level. If you can pick up extra hours or take on a side hustle, then this will be extra income that you can report in the mortgage application.

Don't change jobs

As tempting as it may be to try to get a higher-paying job, it's never a good idea to do so before applying for a mortgage. Most lenders want to know that you've been working for at least 12 months to show that you've got a steady income.

Keep your credit score high

In addition to your DTI ratio, lenders will also use your FICO Score to determine your creditworthiness. Be sure to keep your credit score up by making payments on time and in full, and using your credit cards responsibly.

Source: iQuanti, Inc.