Can I Buy a House With Outstanding Student Loans?

An outstanding student loan is not necessarily a negative factor when you decide to shop for a mortgage.As long as you make regular payments on your student loan, it can actually be beneficial to you. Your payment history on the loan, and whether you have allowed the loan to go into default, will play the greatest role in determining its affect on your mortgage eligibility.

Facts

Outstanding student loans are education loans you have not paid off yet. This is not to be confused with defaulted loans, which are loans on which all payments have ceased. When you fill out an application for mortgage financing, your lender will review your credit history and take your student loans into consideration when deciding if you can afford a mortgage payment. Student loan debt is common, and consumers often purchase homes while having outstanding student loans appear on their credit reports.

Benefits

A student loan, like a mortgage, is installment debt. This means that rather than your payments freeing up credit for you to spend, as with revolving debt, your payments are made in regular installments until the debt is paid in full. Having installment debt appear on your credit report along with revolving debt creates a well-rounded financial profile. Borrowers with previous experience successfully managing installment debt are less of a risk to lenders.

Considerations

Your credit score is an important factor in determining whether you will be eligible to buy a home and if so, what sort of interest rate you can expect to pay. Your payment history on your debts accounts for 35% of your overall credit score (See References 1). If you have made numerous late payments on your student loan or your loan is currently in default, your credit score will suffer. In addition, your lender will determine that if you cannot manage payments on your student loan, there is a good chance you will also be unable to manage payments on a mortgage. This can result in your application being turned down.

Misconceptions

One common misconception is that late payments on a student loan cannot be erased or altered. While this is true of most debts, some student loans do allow for the repair of your credit history once the loan is brought current. If you have a federal student loan that is in default, you can enroll in the U.S. Department of Education's loan rehabilitation program. Once you have made nine student loan payments on time, your loan will no longer be considered in defaul. In addition, your past payment history will cease to reflect any late payments. This improves your credit score and your eligibility for a mortgage. Lenders of private student loans, however, do not offer this benefit.

Warning

Although it is possible to qualify for a conventional mortgage with a defaulted student loan, an FHA or VA mortgage qualification may prove to be impossible if your defaulted loan is federal. FHA and VA mortgages are government-backed loans, and the government will refuse to lend any more money to you until your student loan is brought current. The government also has the right to garnish your wages, income tax returns and any Social Security benefits you may receive in an effort to recover the overdue loan balance.

References

• What's In Your FICO Score?; Myfic.com
• FSA: Loan Rehabilitation