Although it's possible to buy a house with outstanding student loans, these loans can affect your mortgage eligibility and the payments you can afford. Also, it may be hard to obtain a mortgage if you have defaulted on your student loans. Conventional loans and government-insured Federal Housing Administration loans have different eligibility requirements. However, student loans similarly affect eligibility for both types of mortgages.
If you're repaying your student loans, it's still possible to qualify for a mortgage. Lenders look at your credit score and your debt-to-income ratio. The DTI ratio is your pretax income divided by your monthly debt payments. Your current student loan payment factors into your DTI ratio. The entire balance doesn't matter if you've already agreed to a set-monthly payment amount. As long as the DTI ratio is within the accepted range, the loans won't affect your ability to qualify. According to U.S. News, most lenders won't accept you with a DTI ratio that exceeds 43 percent. Continue making your payments on time because payment history has a significant effect on your credit score.
If you have a loan forbearance or deferment because you're still in school or experiencing an economic hardship, you won't need to make payments yet. Since you'll eventually need to begin paying the loans, the lender will factor the expected payments into your debt-to-income ratio if you're seeking a conventional loan. You can request a letter from the creditor showing what your estimated monthly payment will be so that the lender has an accurate number. If you can't get a letter, the lender may use 2 percent of the total loan balance. This number may be higher than the actual amount of your payments.
At the time of publication, FHA loans won't factor in your student loan payments into your DTI ratio if your loans are deferred for 12 months or more. If your deferment is scheduled to end within 12 months of the closing, FHA counts 1 percent of the total loan balance or the actual payment amount indicated, whichever is greater.
Loans in Default
If you default on a student loan, it'll appear on your credit report for up to 7 years. Even if you rehabilitate the loan and get out of default, the negative account history will stay on your credit report. If your loan is still in default, you may have a tough time qualifying for a conventional loan. You legally owe the debt and any late fees and interest that has accrued, and therefore it can count against your debt-to-income ratio.
Unpaid federal loan debts can result in wage garnishment and bank levies. Consider contacting the U.S. Department of Education to discuss options before you're forced to repay the debt.
FHA loan lenders are required to check for any federal debts you owe using the Credit Alert Verification Reporting System. Regardless of how long ago you defaulted, the lender can count the debt against you if you never rehabilitated or repaid the loan debt. You may need to enter a U.S. Department of Education loan rehabilitation program or consolidate your loans to get out of default before you can qualify. Both options require multiple consecutive payments before your loan is out of default.