How to Move Past Student Debt — and into a House

By Bob Walsmith Jr.
President 2022
Santa Barbara Association of Realtors

You want to buy a house. But you’re worried about not qualifying for a mortgage because of your student loan. You’re not alone. According to a National Association of REALTORS® survey, half of non-homeowners (51%) say student loan debt is holding them back from buying a home. This number jumps to 60% for millennials.

Student debt is no longer just a first-time home buyer’s problem People in their 40s and 50s who are still repaying their student loans. They went back to do a master’s or it was parents who co-signed their children’s student loans.

President Biden brought some relief (not reflected in previous numbers) when he announced in late August 2022 that he would forgive $10,000 in student loan debt for those earning less than $125,000 a year. The relief includes an additional $10,000 for those who received Pell grants for low-income students.

Student loan repayments have been suspended since March 2020, but are expected to resume in January 2023.

Despite the uncertainty about the timing and impact of debt forgiveness, you can get a mortgage while you have student debt. Here are some tips for getting there.

#1 Reduce your debt to income ratio.

Your debt to income ratio is one of the most influential numbers in your life since your ACT score. It measures the percentage of your monthly income that is used to pay your debts. You calculate it by adding up all of your monthly debts — credit card minimums, rent or mortgage, car payments, and, yes, student loan payments. Then you divide the total by your monthly gross income (net salary before taxes and other monthly deductions).

You can improve your debt-to-income ratio in three ways: earn more money, spend less money, and pay down your debt.

#2 Increase your credit score.

Your credit score is the other number that profoundly affects your financial fortunes. It’s basically a rating for the type of work you do paying your bills. The easiest ways to increase your credit score are to pay your bills on time, use less than 30% of your credit card credit limit, and pay off your debts.

#3 Get a co-borrower.

Want to instantly improve your chances of getting a mortgage? Put a co-borrower on your mortgage. Their income counts in the debt-to-income ratio, and their credit history bolsters yours. Your strengths combine to bolster your financial credentials, and it can offset the dead weight of your student loan debt.

Co-borrowers are not uncommon. This is a good way to go for a buyer who just doesn’t have enough money from his monthly income to qualify for a mortgage. Most of the co-borrowers he sees are usually parents, siblings or grandparents. Most co-borrowers are family members or someone with whom the owner has a personal relationship. Remember that a co-borrower will share title to the home. If that’s not your cup of co-ownership, consider a co-signer. Their income will improve your financial profile, but they will not be co-owners of the house.

#4 Examine student loan protection programs.

You may be eligible for loan forgiveness if you are a teacher, attended a for-profit school that closed, or are totally and permanently disabled.

#5 Get help from your employer to pay off student debt.

Some companies offer student loan repayment assistance as a benefit. Repayment of employer-sponsored student loans may become more common.

#6 Reduce your student loan payments.

You can do this in two ways:

• Opt for an income-based repayment plan for federal student loans. You can apply for loan repayment plans that will lower your monthly payment on a federal student loan based on your income and family size. The Income Base Repayment Plan caps your payments at 10% of your Discretionary Income. It also forgives the remaining balance of your loan after 20 years of payments. This can go a long way towards lowering monthly debt payments and your debt-to-income ratio.

• Refinance your private student loans. It’s a good idea if you have private student loans that don’t qualify for federal loan relief or have variable rates. If you can get a lower interest rate, you can change your life. For example, if you have $30,000 in private student loans with an 8% interest rate, you will pay $364 for 10 years. Refinance that into a 15-year loan at 4% interest, and your payment drops by $142 per month. You’ll also save about $3,735 in interest over the life of the loan.

#7 Get a mortgage broker who will coach you.

Look for someone who has experience working with borrowers who have more student debt than they would like. Get a broker who will work with you to find DPA programs; guide you through the ins and outs of conventional FHA and VA loans, and help you get your finances in order so you become a better mortgage candidate.

The essential

There is no quick fix for buying a home when you have student loans. The good news is that there is more public support for canceling student debt. Many economists argue that canceling student loans, like Biden’s debt cancellation plan, would put money back in Americans’ pockets. This would stimulate the economy and encourage the formation of more businesses and households. More businesses mean more jobs, and more households mean more spending. And spending fuels the US economy.

Bob Walsmith Jr. is a Southern California native and Realtor® at Berkshire Hathaway HomeServices California Properties in Santa Barbara. During his work with the Santa Barbara Association of Realtors, Bob has served on the CORE Committee, the Education Committee, served as Chair of the Budget and Finance Committee and the Multiple Listing Service Committee. He is also a member of the board of directors of the Alpha Resource Center in Santa Barbara. Bob lives in Goleta with his beautiful wife Julie. When he’s not working, Bob enjoys golfing, tasting fine wine, eating well and walking our beautiful coastline. Bob can be reached at 805.720.5362 and/or [email protected]