I am in my twenties and am considering buying a house. I have no credit card debt, but I owe about $ 20,000 in student loans. Will it hurt my chances of getting a mortgage?
Not necessarily. When you apply for a mortgage, lenders don’t just look at how much you owe; your income is also a factor.
Mortgage lenders traditionally follow what’s known as the 28/36 rule: no more than 28% of your monthly gross income should be spent on your mortgage payments, property taxes, and insurance. And your total debt repayments should not exceed 36% of your gross income.
Two other factors are also important: the more money you put in, the less risk the lender takes and the more likely you are to get a mortgage. Especially in today’s market where lenders are looking for impeccable borrowers, a larger down payment makes you more attractive.
And, of course, lenders look at your credit score. Here, too, your student loans could have an effect, but not necessarily a negative one. When credit scores are calculated, student loan debt is viewed more favorably than credit card debt.
This is because the FICO score, which most lenders use, divides debt into two categories: installment loans and revolving loans. Student loans, mortgages, and auto loans – which require you to pay a set amount each month – are installment loans. Credit cards, which allow you to control your monthly payments, are revolving loans.
Having a lot of money in installment debt won’t hurt your credit score as much as maxing out your credit cards.
Nevertheless, young adults often have problems with their student loans, either because they cannot afford to make the payments or simply because they choose not to. But new graduates usually build their credit history on the basis of one credit card or two student loans, so it’s important not to fall behind. If you’re having trouble repaying your Federal Stafford loans, you have several options:
If you’re having trouble finding a full-time job or having other economic hardships, save time by asking your lender to postpone your loan repayment.
If you work for peanuts, you can reduce your payments by extending the loan term or basing your payments on your income. (See How to repay student loans.)
A bill just passed by Congress would gradually introduce even more generous repayment terms for borrowers who need help. See A Break on College Costs for more information.