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Q&A: Can We Get Approved For A Mortgage With $109k In Student Loan Debt?

Should you buy a home even with big student loan debts? It depends on your goals.Q. My wife (28) and I (27) just got married and we are hoping to buy a small starter house sometime in the next three years. We’ve discussed finances [a lot] so we feel ahead of the curve there.

I make $65,000 a year as an engineer and she makes $32,000 at a non-profit. We have a four-month emergency fund of $10,000 and plan to have $20,000 as a down payment as early as next summer. The only debt we have is my wife’s student loans: $109,000 for her bachelor’s and master’s degrees in a mix of private and federal loans.

What will be our best approach when looking into mortgages? Will her student loans hurt our chances of mortgage approval? Should I consider applying without her? Should we shift some of the money we had intended for a down payment towards the student loans to improve our debt to income ratios (and put off buying the house)? – Mike

A: When deciding to approve a mortgage, banks look at three things:

The debt-to-income (DTI) ratio is the big question mark that you will need to watch closely.

To calculate DTI, add up your total monthly debt payments (including the prospective mortgage payment) and divide it by your gross (pre-tax) income. Although the criteria vary by lender, it’s my understanding that banks want to see a total debt-to-income ratio of 40 percent or less.

I don’t know your monthly student loan payment, but I ran a quick calculation on a $109,000 balance over 10 years at an average six percent interest rate. That has a monthly payment of $1,210.

Making $8,083 a month, you could have monthly debt payments of up to $3,233 and fall within banks’ lending criteria. With the $1,210 loan payments, you could take on a mortgage payment of up to $2,023 (including taxes and insurance).

The operative word, of course, is “could”.

We money hackers know that just because a bank will let us do something doesn’t mean we should! In my opinion, paying 40 percent of your gross income towards debt each month is pretty scary. Consider that:

  • Figuring in taxes, you’ll be paying more than 50 percent of your take-home pay towards debt.
  • If one of you were to lose your job and you drain your emergency fund, keeping up with all of your expenses will be extremely difficult. You’d be house poor. 

I would be more comfortable with a maximum debt-to-income ratio of 25 percent. As an example, the only debt my wife and I carry now is a 20-year mortgage and a small federal student loan with a five percent APR, and our debt-to-income ratio is about 14 percent.

You and your wife need to figure out your comfort zone. If you’re ready to settle down and believe that your incomes will go up and your student loans will be paid off eventually, you may be willing to live with a higher ratio now knowing that it will go down in time…that’s a gamble that many young Americans make (or at least used to make before 2008!)

As a final note, you asked about applying for the mortgage on your own. You can do this, but your application will be based upon your credit and your income alone.

In addition to the maximum debt-to-income ratio banks require, they have a lower threshold for the maximum housing payment they will approve (the mortgage payment including taxes and insurance). This is usually 28 or 30 percent of gross monthly income. So if your income alone is $5,417, you could get a mortgage payment of up to $1,517 using the 28 percent rule.

Result: Even with your wife’s loans, you could still borrow more together. But again: not that you should.

What would you do if you were in Mike’s shoes? Have you bought a house in spite of big student loan debts? Do you feel it was the right move? Pitch in with a comment.

Got a money question? I occasionally take a reader’s question and answer in a post. Send yours to david@moneyunder30.com. 

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Think about consolidating the loans, even if it’s just the federal. (He mentioned that there was a mix of private and federal). That usually brings the loan payment amount down.

  2. I agree with David that I would move the needle on those student loans (yes, using the down payment savings) before taking out a mortgage. You can try various games with your income, like only living on yours while you use all of your wife’s to pay off her loans or to practice putting over 50% of your take-home pay toward rent and debt payments.

  3. Interesting dilemma. I have $128k in student loans and make $110k per year and am looking to buy a house in the next four or five years after my significant other and I get married and this same issue has kept me up at night. One thing you might consider is signing up for either IBR or the extended 30 year payment plan for the student loans because that will lower your monthly payments and in turn lower your debt to income ratio. You would be eligible for the 30 year payment plan based off your total student loan debt (I think you need over 30k or 40 k to qualify). I am currently on IBR and am going to shift to the 30 year plan when my IBR eligibility changes and I am aggressively paying much more than the required monthly payment. The lower required payment gives me the flexibility to either pay down the loan quicker and not buy a house or else make the required payments and save for a down payment.

    • David Weliver says:

      Good points, Steve. I edited out the perhaps pertinent fact that they just went OFF an IBR plan when they got married and combined incomes. Extending payment terms is always an option, I think, if you have the discipline to make bigger-than-required payments as your income increases — or diligently invest the difference!

  4. I don’t think there’s anything wrong with waiting to buy a home and focusing more attention on paying down some of that student-loan balance. Personally, I would not want $100K in student loans and a $100K+ mortgage. That amount of debt would keep me awake at night. I would also consider a larger emergency fund. I know Suze Orman recommends eight months in expenses in an emergency fund, though others find that extreme. If you’re embarking on the journey of homeownership, there can be major expenses and you have less flexibility, so having a larger buffer can be helpful. My husband and I are waiting a few years and trying to pay off our student loans before buying a house, but our remaining balance is much smaller. In the meantime, congrats to this couple for saving up for a downpayment and an emergency fund!

    • This.

      I would only add that it may be useful to look into the reasons why you want a home within the next three years. Is it more psychological than financial?

      I personally would not want to have that much debt.

    • I agree with Denise 100%. I would not want to start my life out with so much debt and not a secure job. That is why so many Americans had problems a couple years back. Also 4 months on your incomes is not enough in my book. I make $45,000 a year and support me and my wife we have about 6-7 months of EF and plan to get another 2-3 soon. The only debt I carry is a car loan for $8,300. All my school is paid for and so is hers for now. Inless we pursue higher degree’s, this is due to the military. If i was in your shoes I would not go into more debt for a house right now. As long as it seems it would take i would live off of one income this can be done and use the other to pay the debt off in probally 3 years. Than that 4th year save up that extra money and use that to as a downpayment on the house. I would want at least 6 months of EF if I were you. I have a pretty secure job being military and i want more than 6 months. This way i will never be one of those people complaining about the economy and job market due to i took out to much debt and can’t afford it now. But each person has there bounderies with debt.

  5. Rose Bellini says:

    One other comment regarding IBR, as my husband and I are in a very similar situation–salaries almost exactly the same, and my husband’s student loan balance a little more.

    Even if you are married, you can file your taxes separately (Married, filing separately). The IBR system will only take into account the student loan holder’s income, and your payment could be much, much less. (The difference for us was $800 vs. $150).

    So this might be something to consider doing going forward to lower how much you pay towards that debt each month.

    Thanks for this topic!!

  6. I think it depends on where they are buying their house, just in case they need to sell it our rent it out (or get a roommate to help out). Definitely focus on debt repayment. Have they tried ReadyForZero?