Student Loans and Mortgages: A financial balancing act

You’ve done your time in academia and have come out of college or grad school with a solid job, a good-looking spouse, and, if you’re like most college graduates these days, a fair amount of student debt. After renting for most of your adult life, you might feel ready to purchase your own home and have a space that is truly yours.

It’s certainly possible to qualify for a mortgage while you’re paying student loans, and in many cases it’s even financially advantageous. But before you stay up all night trolling online sites to find your dream home, there are a few factors you should consider to make sure you’re ready to handle both your student loan payments and a new mortgage. Prepare your finances first — then start packing.

Determine When and Where to Buy

Buying a house is a huge investment of both time and money. Before you dive into your search headfirst, take time to reflect on your short-term and long-term goals. Start by asking yourself a few questions:

• Do you expect to stay at your job, or in your city for the next few years?

• Do you plan on expanding your family?

• Is the rent in your city exceptionally high?

Figure out how long you expect to stay in a new home, and whether renting or buying is the better value in your city. Once you decide that buying is the right choice for you, you can then determine how your student loans might affect your ability to qualify for a mortgage.

Make Sure You Can Afford Your Monthly Payments

It’s no secret that finances are an important factor when deciding on your price point. You might be able to handle your monthly principal mortgage payment, but there are many other fees to consider. Here are the most common ones:

• Interest

• County or city real estate taxes

• Homeowners insurance

• Mortgage insurance (if you have less than a 20% down payment)

These annual fees are broken down and incorporated into your mortgage payment each month. You also need to factor in the cost of home repairs. For relatively new houses, be prepared to set aside at least 1% of the home’s value each year for upkeep. All of these extra expenses might start to feel like a burden if you’re already paying off a sizable student loan balance.

Look at your Finances from a Lender’s Point of View

One of the biggest ways your student loans can affect your ability to qualify for a mortgage is through your debt-to-income ratio, or DTI. This number helps both you and your lender determine what mortgage amount you can realistically afford to repay. For most loan programs, you’ll need a DTI of 41% or lower. Here’s how to calculate yours:

Start by adding up all of your recurring monthly debts, like your credit card minimums, car loans and student loans. Don’t include bills like your cell phone, car insurance or utilities. Then divide that number by how much money you make each month (before taxes are taken out). Multiply your answer by 100 and you’re left with your DTI percentage. Let’s take a look at an example.

Claudia earns $4,000 each month before taxes and health insurance are deducted. She doesn’t have credit card debt, but her monthly student loan payment is $500, and her car payment is $400. So in total, her recurring debt payments come to $900.

$900 / $4,000 = 0.225

That means Claudia’s debt to income ratio is 22.5% — she’s a great candidate for a mortgage!

Consider the Pros and Cons of Refinancing Your Student Loans

You could always increase your down payment amount to lower your home loan starting balance and the associated DTI, but if you don’t have the cash or simply don’t want to deplete your savings, refinancing your student loans may help you qualify for a mortgage. Start by looking for a lower interest rate from private lenders.

Federal Student Loans

Federal loans are already consolidated, and cannot be refinanced, so you’re unlikely to save any money on interest with regard to them. What you can do, however, is lengthen your loan term on a federal loan. On the plus side, you’ll enjoy lower monthly payments, which can help get your DTI under 41% for buying a house. The downside is that you’ll pay substantially more interest in the long run.

Private Student Loans

Shop around with several different lenders to find the best rates on private loans. As with federal loans, you can extend the payment term to lower your monthly payments, or you can check into alternative lenders who use more diverse underwriting standards compared with traditional financial institutions. Refinancing your student loans is a big decision, so make sure to do your research and review multiple lenders before making a commitment.