Overcoming Student Loan Debt Hurdles for Homebuying

Many first-time homebuyers are facing growing student loan debt as a common obstacle when trying to qualify for a home loan. The Wall Street Journal has called the class of 2014 "The Most Indebted Ever." Student loans have become the second highest form of consumer debt, resulting in Millennials and other first-time buyers delaying home purchases, as most graduate owing an average of $33,000 in student loans.

Student loan debt affects qualifying for a mortgage through:

Credit Scores

Making a late payment, or missing one altogether can negatively affect a borrower's credit score, limiting their ability to qualify for lower interest rates and loan programs. On the other hand, on-time student loan payments can help positively increase a borrower's credit score and help build their credit, increasing their ability to qualify for more affordable loans. Homebuyers are also often unaware that the actions of co-signers on private student loans can affect the borrower's credit standing.

Debt-to-Income (DTI) Ratios

Student loan payments reported on a credit report are counted towards borrower DTI calculations. If a student loan doesn't show on the credit report due to a deferred status, Fannie Mae's new guideline, effective April 1, 2015, requires lenders to count the greater of either 1% of the balance of the student loan or the actual documented payment to determine a borrowers reoccurring monthly payment. Formerly requiring 2%, this change could positively help homebuyers with student loan debt attempting to qualify for a mortgage.

First-time buyers shouldn't perceive student loan debt as a major obstacle to qualify for a mortgage. Meet with a lender early in the process to alleviate concerns, and obtain an accurate picture of your ability to qualify.

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