How Much of an Effect Does Student Debt Really Have on Home Ownership?

College kids aren’t just coming out of school with a degree; they’re also leaving with a heap of student debt.

But while college grads may be strapped with a few years of student loan repayments ahead of them, that doesn’t necessarily mean that the debt should be an obstacle to getting approved for a mortgage.

Of course, there are a few other factors that will play a part in whether or not a stamp of approval will be granted, such as employment history and credit score.

What Do Lenders Really Care About?

Three metrics typically come into play wen lenders are deciding whether or not to approve or deny a loan application:

▪          Credit score

▪          Income compared to expenses

▪          Employment history

Let’s have a look at each in more detail.

Credit Score

Even if you have a ton of student debt that you still need to pay off, that doesn’t mean that your credit score necessarily has to suffer. As long as you are making your monthly payments in full and on time every month, your credit score should be healthy (as long as you’re doing everything else right).

Lenders will usually feel more comfortable loaning out a big chunk of change if your credit score is 750 or higher. To have a score like this, it means you’ve been making all of your payments promptly and have a solid history of using your credit. The last thing you want your potential lender to see on your credit report is a string of late payments, collections, or even bankruptcy.

This goes for your student loans too. If you want to boost your chances of getting a mortgage, make sure you’re always paying your student loan on time.

However, forbearance will have a negative effect on your credit score. Forbearance (or ‘deferment’) allows you to put a temporary halt on making your federal student loan payments, or temporarily decrease the amount of money you pay. If your student loan is in forbearance, it’ll reported to credit bureaus as a non-paying debt, which will do nothing but cause your credit score to plummet.

This doesn’t mean that lenders don’t mess up from time to time. In fact, according to the Federal Trade Commission (FTC), about one in four consumers find errors on their credit reports that could negatively affect their credit scores. That’s why you should always pull your credit report before applying for a loan to see if there are any mistakes that should be rectified. If you find anything incorrect on this report, the credit bureaus are obligated to investigate.

Income and Expenses

One thing that lenders take a good hard look at when scoping out potential borrowers is all the expenses in relation to overall income. They want to make sure that you can easily and comfortably afford to continue to pay off your current expenses, in addition to taking on additional debt.

To figure this out, lenders will usually look at a couple of equations:

Debt-to-income ratio – Basically, this fancy number represents nothing more than your monthly gross income that is dedicated to paying off current debts (along with taxes, fees, and insurance). More simply put, it’s the amount of debt you’ve got compared to your overall income, and is expressed as a percentage. Lenders usually like to see borrowers with a debt-to-income ratio of no more than 36 percent – the lower, the better.

Payment-to-income ratio – Also expressed as a percentage, your mortgage should ideally not exceed more than 28 percent of your total income. Any higher than this number could flag the lender to hesitate further burdening you with added debt.

Your student loan debt could have an affect on how your lender believes you’ll be able to pay a mortgage. If your total debt payment (your student loan, mortgage, and other miscellaneous debts) are calculated to be more than 36 percent of your income, you can probably assume that a mortgage won’t be approved. But if you can keep it under this number, you have a shot at approval.

Employment History

An important factor that lenders will look at before approving you for a mortgage is your employment history. They want to know that there is a stable source of income that’s readily available to pay the mortgage off every month. While some lenders are pretty stingy and want to see at least two to five years of work experience in the same industry, other lenders are satisfied with at least one year to help determine your regular income.

This is a toughie for recent college grads who haven’t had enough time to accumulate this much work experience. That’s why graduates might want to consider renting for a few years first. This will provide the opportunity to continue to build good credit by paying the rent on time and every month. Lenders like to see history like this before approving anyone for a mortgage.

However, if you’ve been working for a few months after graduating, and have maintained a steady job throughout school, this may count for something if you’re considering applying for a mortgage right out of the gates.


Student loans on their own won’t prevent you from getting approved for a mortgage, despite what many might believe. Other factors also come into play, including your credit history, your income, and your total debt amount. If these numbers are pretty healthy, and you’ve been pretty responsible with managing all your debt, there shouldn’t be anything standing in the way of getting a mortgage.

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