Here’s How Student Loan Debt Affects Your Mortgage Approval

Student loan debt concept image
  • Student loan debt can make it harder to get approved for a mortgage loan.
  • It can increase your debt-to-income ratio and influence your credit score.
  • It could limit your ability to save up for a down payment and closing costs.
  • Even so, it’s possible to qualify for a mortgage loan with student loan debt.

Student loan debt has been in the news a lot lately, and for several reasons.

There’s the sheer volume of it, for one thing. In 2021, there are approximately 45 million borrowers in the U.S. who collectively owe nearly $1.7 trillion in student loan debt. That’s a record-breaking level of debt among this group.

Also, federal student loan payments that were paused during the pandemic are about to start up again, as of February 2022. This restart has worried borrowers and politicians alike.

As a result of these trends, a lot of future home buyers are now wondering how their student loan debt might affect them when applying for a mortgage loan.

Here’s the short version. Carrying student loan debt may or may not be an issue when qualifying for a home loan. Whether it hurts your chances or not will largely depend on two things: (1) the total amount of debt you have in relation to your income, and (2) whether or not you’ve kept up with your payments in the past.

By the time you finish reading this article, you’ll understand the close relationship between student loan debt and mortgage approval.

How Student Loan Debt Can Affect Getting a Mortgage

Studies have shown that a lot of people who have student loan debt feel that it will prevent them from buying a house. In a paper published back in 2019, researchers from the Federal Reserve wrote:

“In surveys, young adults commonly report that their student loan debts are preventing them from buying a home. Our estimates suggest that increases in student loan debt are an important factor in explaining their lowered homeownership rates, but not the central cause of the decline.” 

Consumer & Community Context, a Federal Reserve report.

But let’s be clear about something right up front. Student loan debt — by itself — won’t necessarily prevent a person from qualifying for a mortgage loan or buying home. It’s the amount of debt that matters most. Having too much of it can definitely cause problems for mortgage applicants.

Here are three ways student loan debt could affect a person’s mortgage application and approval process.

1. It could push your debt-to-income ratio over the limit.

When you apply for a mortgage loan, the lender will review your debt-to-income ratio to determine your ability to repay the loan. This ratio, which is typically expressed as a percentage, shows how much of your income goes toward your recurring debts.

For example, if a person spends 35% of her income on recurring monthly debts, she has an overall debt-to-income (DTI) ratio of 35%.

This is another area where student loan debt can affect the mortgage underwriting and approval process. In short, a person who carries too much debt relative to their income could have a harder time qualifying for a home loan. The reason for this is simple. Mortgage lenders don’t want to offer financing to borrowers who might struggle to pay it back.

The question is, how much debt is too much? This will vary from one lender to the next, and also depending on the type of loan being used.

These days, mortgage lenders tend to limit borrowers to a maximum DTI ratio somewhere between 43% and 50%. But they also might allow a slightly higher debt-to-income ratio for borrowers who have certain “compensating factors” in their favor. So those figures aren’t necessarily set in stone.

For example, a person with a relatively high debt load might still qualify for a home loan if he or she has a long history of making payments on time. Similarly, a person who makes a larger down payment and/or has more money in the bank might still qualify for a mortgage — even with a high debt load.

2. It can limit your ability to pay for closing costs and down payment.

Student loan debt can affect the mortgage approval process in other ways as well. Depending on the amount, it could also make it harder for would-be home buyers to save enough money to cover their down payment and closing costs.

A home buyer’s closing costs can easily add up to thousands of dollars. This is especially true when a mortgage loan is used to finance the purchase. On average, buyers tend to pay somewhere between 2% and 5% of the purchase price in closing costs.

Having a lot of student loan debt could hinder a person’s ability to cover these mortgage-related costs.

In some cases, a home buyer might persuade the seller to contribute money toward their closing costs. This is common in slower real estate markets where sellers tend to be more motivated and flexible.

Additionally, mortgage lenders sometimes offer to pay some or all of the borrower’s closing costs, in exchange for charging a higher interest rate.

But in most scenarios, the buyer has to pay something on closing day. A person who is living “paycheck to paycheck” (partly due to their student loan debt) will have a harder time paying for these upfront expenses.

The down payment is another important consideration. And student loan debt plays a role here as well.

The down payment on a home purchase might range from 3% to 10% of the purchase price. Or even more, depending on the type of loan and other factors. A person grappling with a high level of debt would have a hard time saving up for this upfront investment.

3. Student loan debt can affect your credit score.

Student loan debt can also affect you getting a mortgage loan by altering your credit score — for better or worse.

Mortgage lenders use credit scores as part of their risk-analysis process. Generally speaking, a lower score represents a high-risk borrower, while a higher score indicates a lower risk to the lender. That’s because these scores are largely based on a person’s past payment history.

People who typically pay their debts on time and in full tend to have higher credit scores. Mortgage lenders view these people as less of a risk, and are more likely to lend money to them.

People who have a pattern of late or missed payments in the past tend to have lower scores, and are seen as a bigger risk. These people have a harder time qualifying for loans and often get charged higher interest rates.

This is another area where student loan debt could affect a person’s ability to get a mortgage loan. And it can go one of two ways:

  • Making your student loan payments on time can actually boost your score, and that might increase your chance of qualifying for a home loan.
  • On the other hand, being late or delinquent on student loan payments could lower your score and make it harder to get a mortgage.

A Recurring Theme from This Article

You might have noticed a recurring theme in all of this. Student loan debt by itself is not necessarily a dealbreaker, when it comes to applying for a mortgage loan. It’s the amount of debt that’s important to lenders, along with the person’s payment history.

If a person’s debt-to-income ratio falls within the lender’s parameters (and they’ve generally made their payments on time in the past), they might be a strong candidate for a mortgage loan.

If the DTI ratio is too high, and/or the person has a pattern of missing payments in the past, they will likely have a harder time getting approved for financing.

Because of these variables, some borrowers with student loan debt have no trouble getting a mortgage loan, while others might get denied financing. Much depends on the borrower’s overall risk profile — and that’s something that varies from person to person.

Disclaimer: This article explains some of the ways student loan debt can affect the mortgage application, underwriting and approval process. Lending scenarios can vary widely from one borrower to the next, due to the many variables involved. So portions of this article might not apply to your particular situation. The best way to find out where you stand is to speak to a lender.