Applying for a Loan When you Have a Student Loan

Monthly student loan payments can negatively impact you debt-to-income ratio, but they don’t make the dream of home ownership impossible.

Good news. Having a student loan doesn’t automatically mean you’re an unqualified buyer. Yes, student loans mean you’re carrying some debt. And, making those monthly payments can definitely curb the amount you are able to save for a down payment. But, there’s a lot more affecting your ability to buy a house than just the cash you have in the bank. Your debt-to-income ratio and overall credit score also play a huge roll in getting pre-approved. By understanding what these are and how they work, you can position yourself for the most success possible.

What is Your Debt-to-Income Ratio?

Your lender will calculate your debt-to-income ratio income ratio by adding up your monthly payments and dividing this sum by your monthly gross income. Your monthly payments could include: credit card bills, car payments and student loan payments. This does not include other budget expenses such as utilities. Your gross income is the amount you earn before taxes and deductions.

How Does Your Student Loan Affect Your Debt-to-Income Ratio?

The size of your monthly student loan payment can fluctuate greatly depending on your payment plan. Making larger payments allows you to pay off your student debt more quickly, effectively lowering the overall cost of your loan. However, these larger payments can also negatively affect your debt-to-income ratio as they reduce the amount each month you have available to cover a mortgage payment. 

The traditional student loan payment is a standard one, where you make the same monthly payment until your loan is paid off. To reduce your monthly payment (for a while), you can switch to a graduated payment plan. This reduces your monthly payment for a time, with a gradual increase in years to come. (It’s important to realize that this graduated payment structure makes the assumption that your salary will rise in the next few years.)

What is Your Credit Score?

Your credit score is a three digit number lenders use to determine your trustworthiness as a borrower. It’s based on five factors:

Your Payment History

The Amount You Currently Owe

The Length of Your Credit History

The Types of Credit Your Currently Use

The New Credit You’ve Recently Acquired

Higher credit scores give you way more options as a borrower. Specifically, it makes you eligible for lower interest rates.

How Does Your Student Loan Affect Your Credit Score?

Making regular student loan payments can help you build a strong payment history. Subsequently, being delinquent on your payments can have the opposite affect.


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