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How to Get a Mortgage, Even with High Student Loan Debt

Just because you’re burdened with high student loan doesn’t mean you can’t get a good mortgage deal – but good credit will help
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Americans continue to hold a staggering amount of student loan debt, with the potential to derail many people's hopes of buying a home.

The most recent data shows that American student loan borrowers – 45 million strong – owe about $1.7 trillion in student loan debt. That makes student loan debt the second-highest consumer debt category, behind mortgage debt, but more than auto and credit card debt.

For would-be homebuyers, shouldering excessive student loan debt may dissuade them from pursuing a mortgage. That’s understandable, as the notion of adding mortgage debt to student loan debt may lead some home loan lenders to reject a mortgage loan application.

But that line of thinking is actually out of line, mortgage experts say.

“With good credit, homebuyers that have student loan debt can get a mortgage,” said Jon Boden, strategic financial advisor at Real Estate Bees, in Suwanee, Ga. “There are a few ways that it’s handled, depending on the type of loan that homebuyer is considering.”

As with most home loans, experiences vary based on a borrower’s unique financial situation.

“It's hard to place a value on the home mortgage experience - it’s different for everyone,” said Rick Pendykoski, owner at Self Directed Retirement Plans LLC, in Goodyear, Az.

For starters, most people need a FICO credit score of over 720 to obtain a decent mortgage rate and lower their mortgage insurance.

“A less than a 720 FICO credit score usually means you’re paying higher rates and mortgage insurance premiums,” Pendykoski told TheStreet. “Getting a mortgage is much more difficult than getting an auto loan or credit card. Most of the time people just put in an application for a car loan/credit card and it’s either approved or denied.”

The main problem? With a mortgage application, all personal information is reviewed and investigated. “That includes debt-to-income, credit worthiness, income, savings, and three years of tax returns, among other financial credentials,” Pendykoski said.

If you can’t demonstrate good credit, having an income-based student loan repayment agreement can pave the way for a mortgage approval.

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“That means the payment agreement is based on the income of the borrower and the terms set at that time,” Pendykoski noted. “Therefore the mortgage lender has to abide by the repayment terms set by that agreement. That’s the fact, even if you pay more on the balance each month than what’s due under that agreement.”

How You Handle Your Student Loan Matters

Also like any sizable loan, mortgage lenders will want to know a student loan’s payment history – good or bad.

“Student loan debt isn't a particular area of focus over any other type of debt, such as a credit card balance or a car payment,” said Tabitha Mazzara, director of operations at Mortgage Bank of California (MBANC), in Manhattan Beach, Cal. “It all goes into the same calculation of your credit score and how lenders look at you. If you make your payments on time, it looks good, and if you are often late, it does not.”

MBANC also looks closely at a borrower’s debt-to-income ratio, which is the ratio of how much you earn versus how much you owe.

“If you have a huge balance of student loans, but that’s offset by a good income, you're not harmed,” Mazzara told TheStreet. “A loan balance of around 36% or lower is not bad - we recommend looking at the many online calculators to find your number. But even if it's high, we can find a way to work with you, so don't give up too quickly before you've spoken to a reputable mortgage lender.”

Consequently, having a high student debt load won't necessarily mean no lender will give you a mortgage loan, but it could mean paying a bit more in the interest rate.

“Bear in mind that a home is a long-term investment, and as time goes by, and you've paid down your student loans, you can look into a better deal through refinancing,” Mazzara said. “If you have a good education, hopefully that translates into a good career, and your earning power will only rise as your student debt falls.”

When Student Loan Debt Won’t Hurt

Mortgage experts say it’s relatively easy to get a mortgage even in the current higher interest rate environment with a credit score of 740 or higher, a down payment of at least 5% and a salaried or full-time job.

“Borrowers with lower credit scores (down to 580) may qualify for a government backed FHA loan with a 3.5% down payment, but they’ll have to provide extra proof they can repay the loan,” said Denny Ceizyk, housing and mortgage expert at Student Loan Hero by LendingTree. ‘Self-employment or variable commissioned income can make the approval process more difficult, since lenders have to average the income over several years to make sure it’s stable.”

That said, as long as your student loans aren’t in default and you have a repayment plan with a monthly payment in writing, it’s not that hard to get a low interest rate mortgage.

"Mortgage lenders are allowed to use a written payment plan from a student loan creditor even if the payment is $0 (which is not uncommon if you’re just entering the workforce and apply for an income-based student loan repayment plan),” Ceizyk said. “However, if the loans are still in deferment, the lender has to estimate the monthly payment based on a percentage of your student loan balances, even though they aren’t in repayment. This could make it harder to qualify for a home loan, or reduce how much the mortgage company will lend you.”

“That’s why it’s a good idea to ensure you have all of your student loan payment information in order before applying for a mortgage,” Ceizyk added.