Student Loan Payments Resuming Soon, Can You Still Qualify for a Mortgage With Student Debt?

While student loan borrowers benefitted from an interest and payment pause in response to the COVID-19 pandemic, that pause is coming to an end. 

What You Need to Know About Upcoming Student Loan Payments

According to the US Department of Education:

• Student loan interest will begin to accrue on September 1, 2023.
• Repayment will resume in October.
• Borrowers should receive their first bill in September or October, including their payment amount and due date. This information should also be available online. 
• Borrowers should expect to receive their first bill at least 21 days before the payment is due. 

The SAVE Repayment Plan

The Biden administration recently introduced the SAVE repayment plan. Under the new plan, those that fall within certain income limitations will have their monthly payments reduced to $0. 

The income limitations have been increased from 150% to 225% above the Federal Poverty Line (FPL). As of 2023, the FPL is $14,580, so those making $32,805 or less will qualify for having their payments reduced to $0 under the SAVE program. 

The SAVE plan increases the income level exempt from making payments from 150% to 225% of the poverty line. Those that fall within that income level will see their monthly payments reduced to $0.

Borrowers will not see their interest balance grow if they keep up with their scheduled payments under the SAVE plan. Payments have been reduced from 10% to 5% of discretionary income. 

Borrowers whose original principal balances were $12,000 or less will receive forgiveness after 120 payments, or 10 years. 

The SAVE plan is available to current and future student loan borrowers. Those that are currently enrolled in the income-driven repayment plan, REPAYE, will automatically be switched to SAVE. 

The Effect of Student Loans on Homeownership

Education Data Initiative recently shared the following statistics to illustrate the effects of student loans on homeownership: 

• Since 2005, homeownership among recent college graduates has declined by 1.8% for every $1,000 of their student loan debt.
• 51% of renters say student loan debt keeps them from buying a home.
• 72% of student debt holders who do not own homes say they believe student loan debt will delay homeownership.
• First-time homebuyers with student loan debt spend an average of 19% less on their homes than buyers without student debt.

While the effect of student loans are undeniable, it’s important to recognize that there are many programs in place to help ease the barrier to homeownership. 

How to Qualify for a Mortgage With Student Loans

To help assess your creditworthiness as a borrower, mortgage lenders use a debt-to-income (DTI) ratio. Debts such as student loans and auto loans are considered in your DTI ratio. Keep in mind that your monthly payment amount, not the total amount of your student loans, is what will be used in the calculation. 

The DTI ratio is calculated by dividing your monthly debt payments by your monthly gross income. Maximum DTI levels are typically set at 43 percent, but this figure can vary by program and lender. 

Keep in mind your DTI ratio is just one element in the underwriting process, and there are often compensating factors, such as your credit score, that lenders can use to determine your qualification. 

Closing Thoughts

It’s important to choose an experienced lender that can discuss the role of your student loans while exploring financing programs best structured to meet your budgetary goals. 

Many borrowers with student debt can often still qualify for a mortgage. As the landscape of student loans continues to evolve, stay informed regarding decisions about your financial future, and reach out to your trusted loan officer with any questions on obtaining a mortgage with student loans today.