How to Move Past Student Debt — and Into a Home

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

You want to buy a house. But you’re worried you won’t qualify for a mortgage because of your student loan debt. You’re not alone. Half of non-homeowners (51%) say student loan debt is delaying them from buying a home, according to a survey from the National Association of REALTORS®. That number jumps to 60% for millennials.

Student debt is no longer just a first-time home buyer problem People in their 40s and 50s who are still paying off student loans. They went back for a master’s degree, or they are parents who cosigned their children’s student loans.

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

Student loan payments have been paused since March 2020, but are scheduled to resume in January 2023.

Despite uncertainty about debt cancellation timing and impact, you can get a mortgage while you have student debt. Here are a few tips for making it happen.

#1 Lower Your Debt-to-Income Ratio.

Your debt-to-income ratio, is one of the most impactful numbers on your life since your ACT score. It measures the percentage of your monthly income that goes to pay your debts. You calculate it by adding all 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 (take-home pay before taxes and other monthly deductions).

You can improve your debt-to-income ratio three ways: Make 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 fortune. It’s basically a grade for what kind of a job you do paying your bills. The simplest ways to boost your credit score include paying your bills on time, using less than 30% of the credit limit on your credit cards, and paying off 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 toward the debt-to-income ratio, and their credit history bolsters yours. Your combining forces to strengthen your financial qualifications, and that can offset the dead weight of your student loan debt.

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

#4 Look into Student Loan Protection Programs.

You could be eligible for loan forgiveness if you’re a teacher, attended a for-profit school that went out of business, or have a total and permanent disability. 

#5 Get Help from Your Employer to Repay Student Debt.

Some companies are offering student loan repayment assistance as a benefit. Employer-sponsored student loan repayment may become more common.

#6 Lower Your Student Loan Payments.

You can do this in one of 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 basic income-based repayment plan caps your payments at 10% of your discretionary income. It also forgives your remaining loan balance after 20 years of payments. That can go a long way toward lowering monthly debt payments and your debt-to-income ratio.

•           Refinance your private student loans. This is a good idea if you have private student loans that aren’t eligible for federal loan forgiveness 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’ll pay $364 for 10 years. Refinance that to a 15-year loan at 4% interest, and your payment drops by $142 a month. You’ll also save around $3,735 in interest over the life of the loan.

#7 Get a Mortgage Broker Who Will Coach You.

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

The Bottom Line

There’s no quick fix to buying a house when you have student loans. The good news is there’s more public support for student debt forgiveness. Many economists say forgiving student loans, such as the Biden plan for debt cancellation, would put money back into Americans’ pockets. That would boost the economy and encourage the formation of more businesses and households. More businesses means more jobs, and more households means more spending. And spending fuels the U.S. economy.

Bob Walsmith Jr. is a native to Southern California and a Realtor® with 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, Education Committee, been Chair of the Budget & Finance Committee, and the Multiple Listing Service Committee. He also is on the Board of Directors of the Alpha Resource Center of Santa Barbara. Bob lives in Goleta with his beautiful wife Julie. When not working, Bob enjoys playing golf, fine wine, fine dining, and walking our beautiful coastline. Bob can be reached at 805.720.5362 and/or bob@bobwalsmithjr.com