Student Loan Debt: Barrier to Buying a Home?

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February 21, 2014
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Debt can be a large obstacle to overcome as it pertains to buying a home.  Nowadays, one of the biggest and most common sources of a person’s debt is their student loans.  When approving you for a loan, a lender will look at your debt-to-income ratio.  If your monthly debt accounts for too much of your gross monthly income, you will not be able to qualify for most mortgages.  This, however, does not mean you can’t qualify for any mortgage.  Below is a personal account from one of our homebuyers on how she was able to qualify for a mortgage despite her student loan debt.

I participate in a public interest loan repayment program through my law school. On paper, it looks like I have a large student loan debt, but as long as I continue to work at a non-profit, my law school will cover the loan payments. When lenders calculated my debt-to-income ratio though, they looked at the debt and concluded that I could only afford a very small mortgage, even though the student loan payments aren’t actually coming out of my income.

Most mortgages are resold on the secondary market, and my student loan situation meant that I didn’t meet the criteria for that. However, one of the lenders I spoke with told me about portfolio mortgages, which aren’t subject to the same rules because banks keep them in-house for the life of the loan. I talked to several portfolio lenders (mostly smaller, local banks) and was able to find a couple of them that were willing to lend to me.

There are definitely disadvantages – I can’t take advantage of any of first-time homebuyer programs, and interest rates on portfolio mortgages tend to be higher than on regular mortgages. Also, I have great credit and I’m putting 20% down, both of which make me less of a risk, so it’s not something that will work for everyone. Nevertheless, if you are unable to qualify for a traditional mortgage, you might want to look into getting a portfolio mortgage.

A word of caution here.  If your lender is able to figure out a way for you to qualify for a portfolio loan, don’t just do it because they say you qualify.  Only YOU know if you are truly able to afford the loan.  Don’t get forced into anything with which you are not comfortable.

For more information on how to deal with student loan debt, check out the article from our 2014 Homeownership Resource Guide, written by Adam S. Minsky, Esq., titled Can Your Get a Mortgage Even Though You Have Student Loan Debt?  Minsky further explains the barrier student loan debt creates to getting a mortgage and presents various programs available to help.