How to Manage Student-Loan Debt to Get a Mortgage
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What is the main topic discussed in this episode?
Here's your Money Briefing for Tuesday, October 6th. I'm J.R. Whalen for The Wall Street Journal. As Americans look to move out of cramped cities during the pandemic, the housing market has turned red hot.
How does student-loan debt affect your ability to qualify for a mortgage?
But buying a home could be more difficult for people who've got a lot of student loan debt.
The fact that so many people owe so much in student debt is really the trouble. And if you have a large amount of loans, then it's going to be harder potentially to qualify for a mortgage.
Business writer Cheryl Winokur-Monk will go over the steps that prospective homebuyers who are carrying student loan debt can take to help them qualify for a home loan. That's after the break.
As banks tighten their lending standards, outstanding student debt can stand in the way of people qualifying for a mortgage and buying a home. Wall Street Journal contributor Cheryl Winokuramunk is here to discuss ways of managing your student debt to help smooth the path to buying a new home. Cheryl, thanks for being with us.
Thanks for having me.
So mortgage lenders often look not only at an applicant's monthly income, but also their expenses.
What monthly income and expense factors do lenders evaluate when approving a mortgage?
How can mortgage applicants work those factors to their advantage?
Well, there's not much you can really necessarily do about your monthly income unless you're going to get another job. And even then, you have to be careful about job hopping when you're in the process of looking for a mortgage. But when you have a lot of expenses, by paying off some of those expenses or paying them down, you can improve your chances of qualifying for a mortgage. And the expenses that they're going to look at include housing, car payments, student loan bills, and minimum monthly payments on credit cards. And lenders are going to compare that with your monthly income.
So what makes student loan debt in particular such a potential obstacle to getting a mortgage?
Well, the fact that so many people owe so much in student debt is really the trouble. More than 44 million Americans collectively own about $1.6 trillion in student loans. And if you have a large amount of loans, then it's going to be harder potentially to qualify for a mortgage.
Why is student debt singled out as a unique obstacle for homebuyers?
And stricter lending roles the banks have don't make it any easier.
That's true. It may be in some cases that borrowers with a lot of debt aren't going to be able to qualify. On the other hand, even if you can't qualify for a mortgage right now, there may be other things you can do. You may be able to borrow money from parents, for example. There are other potential options. You may be able to just wait a little bit longer and save a little bit more and pay off a little bit more until you're in a better financial situation. You don't want to get yourself in a situation where you're really living paycheck to paycheck and you can't afford your mortgage payments because you're also trying to pay off debt. So as much as you want a mortgage, you do have to take other things into consideration.
So how should mortgage applicants categorize or prioritize which loans to pay off?
Usually when it comes to paying off loans, the advice is generally pay off loans with higher interest rates first. When it comes to helping your ratios, they're called debt to income ratios, for the purposes of qualifying for a mortgage, you may want to do something slightly different. So for example, if you can pay your credit card balance in full each month, it's not going to factor into that debt to income ratio at all. other debt where monthly payments are static, if you can pay down the balance on credit card, that's going to help lower your minimum monthly payment.
And there are lots of options available to make it easier to pay off student loan debt.
Which loans should you prioritize paying down to improve mortgage debt-to-income ratios?
You may be able to change your repayment options so that you're paying less each month. The federal government has a loan simulator tool, and that helps borrowers understand what their monthly payments could be under a different plan. Now, there are all these trade-offs potentially to switching plans, so you may pay more over the life of the loan.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:16
2
How does student-loan debt affect your ability to qualify for a mortgage?
0:16–1:14
3
What monthly income and expense factors do lenders evaluate when approving a mortgage?
1:14–2:10
4
Why is student debt singled out as a unique obstacle for homebuyers?
2:10–3:35
5
Which loans should you prioritize paying down to improve mortgage debt-to-income ratios?
3:35–4:50
6
Can refinancing or income-driven repayment plans help you qualify for a mortgage?
4:50–6:01
7
Will changing jobs or making a larger down payment impact mortgage approval with student loans?
6:01–6:33
Speakers
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