How to Buy a House with Student Loan Debt

So, you think you might be ready to buy your first house. You’ve graduated, you’re working, it’s time to stop throwing money away on rent and take the next step into adulthood: property ownership. Congratulations!

But, wait, how do you go about buying a house with that enormous student loan?

Let’s take a look.

Can I buy a house even with student loan debt?

The short answer here is yes. If your income is high enough to cover both loan payments (and incidentals, like food), you should be able to buy a house even when your student loan is still outstanding.

If your student loan payment is too high, consider refinancing your student loans to lower your monthly payment and overall interest paid on the loan.

The most important factor for lenders is your debt-to-income (DTI) ratio. If it’s less than 43%, you’re good to go. According to the U.S. Bureau of Consumer Financial Protection, “this number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.”

To figure out your DTI, divide your gross monthly income by your total monthly debt payments. For example, if your gross monthly income is $5,500, and you pay a total of $2,000 a month for debt repayment ($1400 a month for your mortgage plus another $600 for the total of your student loan and credit card), your DTI is 36%. This is considered a healthy debt load.

Still, one in nine new home loan applications are denied, and it can be due to something as simple as getting a new credit card just before you submit your loan application. That’s because the new credit card increases the amount of your potential debt, which may push your debt to income ratio into the danger zone. 

The accepted rule of thumb is that no more than one quarter of your income should go to housing. That means that the remainder (75%) of your income has to cover everything else.

How much should I put as a down payment?

Your best approach is to put down as much of a down payment as you can afford. The figure you’ll likely hear for typical down payments is 20%, but remember, that is from the lender. Of course the lender wants a big down payment: It lowers their risk.

But there are two main advantages for you too. With a down payment that’s more than 20% of the purchase price:

  1. Your lender won’t require mortgage insurance.
  2. The total amount of your loan will decrease, as will your monthly payments.

Still, a large down payment has got to fit your budget. This can play out in two ways:

  • If you’ve got the savings but a low income, a large down payment is smart.
  • If you’ve got savings and a high income, a large down payment can actually buy you more house without increasing your monthly mortgage payments.

Can I buy a house with bad credit?

You can buy a house with bad credit or no credit at all, but you won’t qualify for a conventional loan.

That’s because lenders look for three things when issuing conventional mortgages:

If you don’t have an established credit history, you may qualify for a Federal Housing Administration loan. The FHA is part of the U.S. Department of Housing and Urban Development (HUD). It’s HUD that insures your loan. And a government-insured loan means lenders can offer you terms they might not be able to otherwise, one being credit requirements that are easier to qualify for than those for conventional loans. 

Local home buying programs can help

It’s worth noting, though, that you might have to make up for that easier credit requirement with a higher down payment. If that’s the case, you might also look into local home buying programs. Sponsored by your state or local government, these programs offer various resources and assistance programs to help you buy your home.

First-time homebuyers in California who need assistance with the down payment, for example, can contact the California Housing Finance Agency. If you’re eligible for the MyHome Assistance Program, you can receive a deferred-payment junior loan of a maximum of $10,000. 

Other options

Another approach is to find a lender who does manual underwriting, advises Dave Ramsey, author of “The Total Money Makeover.” They’ll take a personal look at your finances to see that you’re financially responsible. This includes proof of income, a history of rental payments, utility bills, phone bills, and insurance payments as well as daycare and/or tuition payments. Ramsey adds that “unscorables” will need a big down payment too, and should aim for 20% or more.

The Department of Agriculture also has a homebuyers assistance program. The Guaranteed Loan Program means qualified rural homebuyers don’t have to put any money down. The goal of the program is to help low and moderate-income households in rural areas make homeownership a reality.

Should I buy a house vs renting?

It depends, and much of it depends on where you live. In nearly half of the country, you’ll save money by renting rather than buying a house. Basically, if rentals in your region cost nearly double the cost of owning, buying a house makes sense. Still, there are costs to ownership, including property taxes and maintenance.

Your career may be a factor too. If you expect to be moving every couple of years, a rental property gives you more freedom than a home you have to sell.

The high ticket price of houses and high down payments (especially for first-time buyers with no credit history) can also sometimes make renting the better option. Especially in times when the economy is weak, unemployment is high and job insecurity is a factor nationwide.

The real benefit of homeownership is that you can build wealth through home equity. According to the U.S. Census Bureau, “homeowners' median net worth is 80 times larger than renters' median net worth.”

How do I find a lender for my mortgage?

Read this HUD booklet called Shop, Compare, Negotiate before you do anything else. 

They compare shopping for a mortgage like shopping for a car – it’s a product and comparing all the costs involved can save you thousands of dollars. They explain fixed and adjustable rates, points, fees, and private mortgage insurance, and have a great worksheet that’ll help you ask the right questions and stay organized.

Remember to ask friends, family members, and your real estate agent for their recommendations. When you’re shopping around, don’t exclude anyone. Try your bank, a local credit union and look into online lenders as well. 

Use that HUD worksheet to ask each of them about:

  • credit history requirements
  • interest rates
  • loan terms
  • down payment requirements
  • property insurance

Some questions are pretty detailed. Don’t be afraid to really get into the weeds. For example:

  • How long does the process take? This is a good question to ask for the pre-approval process as well as for an appraisal and the closing itself.
  • Have the lender spell out any and all the fees you will have to pay. These can include:
    1. Real estate commission (the buyer’s agent typically receives up to 3% of the home’s sale price)
    2. Loan origination (which can be 1% of the total loan amount)
    3. Mortgage points (also called discount points)
    4. real estate appraisal
    5. Credit report (some lenders cover this $30-$50 fee themselves)
    6. Loan application fee (varies widely, from $0 to $500)
  • Will the lender waive/reduce any of these fees? (Be careful: Lenders may lower fees but increase the interest rate on your loan).
  • Do you have to pay the fees upfront or will your lender roll them into your mortgage?

Once you’ve got all the details, you can not just compare them to see what works for you. You can also use the details to ask for better terms. For example, if your bank and a credit union are pretty identical in their rates and requirements, ask your bank to lower its interest rate. To keep your business, they might be willing to negotiate.

Frequently asked questions

This is not a black and white answer by any means. For some, buying a house is considered an investment because they plan on renting it out for a monthly income or fixing it up to sell it for more than it was purchased for, also known as house flipping. But for most, the primary purpose of buying a house is to have a place to live. Historically, real estate has appreciated at a much higher rate than it does now.  Also keep in mind that carrying costs tend to be high, such as any maintenance and repairs that might be required. As well as homeowners insurance, mortgage insurance, and utilities. 

Whether this is a good investment or not depends on your sole purpose for buying the house in the first place and your personal financial situation.

The steps in the process of buying a house might not be the same for every buyer, but generally speaking, they follow a flow similar to this one:

  1. Research. You should be looking at things like the valuation of different areas you’re looking into, how long the typical house stays on the market in these areas, the types of homes you're interested in, and different lenders you might decide to mortgage your house through.
  2. Determine how much house you can afford. A good ballpark is that your house should cost no more than three to five times your annual household income if planning on putting 20% as a down payment.
  3. Get prequalified or preapproved for credit for your mortgage. This is extremely helpful for knowing what houses you can look at and what houses are completely out of your budget. Don’t fall in love with a house you can’t afford just because you didn’t get prequalified or preapproved.
  4. Find a real estate agent that you like and that wants to help you find a home. They have the negotiating skills and the information you need when buying a home that you can’t always find elsewhere.
  5. Tour homes and make an offer on the one you like. Make sure to have a good system in place for keeping track of the homes you like and don’t like. It can be hard to remember everything.
  6. Get a home inspection. This is usually done a few days after your offer is accepted and it’s done so to give you the chance to renegotiate your offer or withdraw without penalty if there’s significant damage to the property.
  7. Select your loan with a mortgage banker. There’s a lot of competitively priced loan programs available, depending on your priorities choose the option that suits you best. That might mean low monthly payments or making sure your payment never increases.
  8. Have your home appraised. This ensures that you are paying a fair price for your home and is done so through a third party entity separate from your lender.
  9. Get the right paperwork. Usually, your lender will arrange for a title company to manage this to make sure the seller is the true owner of the property before it’s sold to you.
  10. Close on the house. Here’s where you’ll sign all the paperwork and wait for your loan to be funded. Once the check is delivered to the seller you can legally move into your new home.

Your household income, monthly debts, and available savings for a down payment are all taken into consideration. These all must be able to be afforded stably with unexpected expenses and unplanned spending accounted for.

You should be able to have three months of mortgage payments, including any other monthly debts in reserve at all times.

Not everyone can qualify for a zero down payment loan but some circumstances might allow you to.

If you’re a veteran you could qualify for a VA loan with no down payment from the U.S. Department of Veteran Affairs.

A USDA loan, The United States Department of Agriculture offers these to help low or moderate-income people. 

The single-family direct homeownership loan for low or very low-income borrowers.

An FHA loan, which doesn't allow you to put zero down, but does allow you to put as low as 3.5%.

You should ask yourself what the purpose of buying a home is. Is this a place to live? To rent out? A starter home? A forever home? This will help guide more questions and help you have a better understanding of what being a homeowner looks like.

You should take into consideration how much debt you have monthly (auto, student loans, credit cards, personal loans, etc). Have you saved enough for a downpayment? Can you afford the mortgage payment comfortably, including the insurance, property taxes, HOA (homeowner’s association) fees, water, sewer, garbage, other utilities? Are you ready to settle down? Are you handy enough to fix a leak, or can you afford someone to fix a leak if you’re not handy enough?

Once you answer all these questions honestly, you should have a better understanding of if you’re ready to buy a home.

The first step is to do your research. There are a lot of competitive lenders out there so go into it knowing which ones have the best rates historically.

You should also improve your credit score as you start to think about buying a home.

Start to save up for a downpayment and save as much money as you can, this will drastically reduce your monthly payments.

Lock in your rate as soon as you can, sometimes the closing process can take months and in that period rates can fluctuate significantly. Make sure you as the lender to lock in your rate as soon as you sign the home purchase agreement and have secured your loan.