Student loans are a part of life for many of us that have graduated college within the last 10-15 years. According to the Department of Education, the average student loan debt in America is $35,397. For those of us that pursued an advanced medical degree, the numbers are a bit more daunting. The average student debt for physical therapists is $96,000 according to the APTA and $201,490 for physicians according the AAMC. Depending on your financial situation after graduation and your own personal goals, many students will require 10-20 years to pay off their student loan balance. That is a long time to be stuck with that much debt. Unfortunately, just under half report of those with student loan debt report waiting to purchase their first home due to the amount of money they owe.
While student loans can help you achieve your educational and career goals, a high amount of debt can also impact your future plans, like buying a home. The truth is, there are a couple factors that can impact your ability to qualify for a mortgage. While student loans can significantly impact the home-buying process, they don’t have to prevent you from becoming a home owner.
On a personal note, my husband and I have dealt with managing student loan debt in the mortgage application process. As you may know, we both graduated with Doctorates in Physical Therapy from Emory University (AKA…not cheap) and left school with a combined total of nearly $300,000 in student loan debt. Ouch. It hurts a little to write that if we’re being honest. The great news is that we had absolutely no trouble qualifying for a mortgage. Why? Well, there are a couple different pieces of this puzzle to consider.
Full Disclosure: I'm about to throw some mortgage terms at you. I'll do my best to define them as I go, but if you find yourself a little confused about terminology this is a great resource to help!
Qualifying for a Mortgage
To qualify you for a mortgage, lenders look at what is called your debt-to-income ratio (DTI). The ratio essentially compares the amount of debt you have to the amount of income you bring in on a monthly basis. There are two different types of DTI ratios: front-end and back-end.
A front-end ratio is also often called a housing ratio, because it only looks at the comparison of your projected monthly mortgage payments (including principle, taxes, insurance and interest) to your gross monthly income (income before taxes).
The ratio is calculated as a percentage. For example, if your gross monthly income is $6,000 and your projected monthly mortgage expenses are $1,500 then your front in ratio is 26%, meaning that your potential housing expenses would make up 26% of your gross monthly income.
Each lender will have specific limits on this percentage for conventional loans but the average tends to hover around 28% for the front-end ratio. Federal Housing Administration (FHA) loans currently allow for up to 31% as a maximum front-end ratio but this number tends to fluctuate a bit over time.
The second type of DTI, the back-end ratio, accounts for all of your debt obligations in comparison to your income. The lender will calculate this by adding all monthly debt payments, including housing expenses, and dividing by your gross monthly income. These debts also include things like car payments, credit card payments and personal and student loans.
The back-end ratio is where a lot of us with student loans may find ourselves in trouble. For example, if you are still making $6,000 a month with a projected mortgage expense of $1,500, a car payment of $350 a month, a $300 monthly payment towards credit card debt and $500 in student loan payments, your back-end ratio is now 44%. Many conventional lenders prefer to see a back-end ratio under 36%. With an FHA loan you can typically go a bit higher, about 43% currently. Want to see where you stand? Check out this DTI calculator from Student Loan Hero. But, if the numbers aren’t what you’d like to see, don’t panic. There are ways to get around it.
How Student Loans Can Impact the Mortgage Process
The important thing to remember is that it’s not the student loans themselves that prevent you from getting a mortgage. The issue typically lies with a high back-end DTI ratio. So, minimizing other non-student debt is crucial to keeping this number as low as possible. That means, if you know you want to buy a home in the future, keeping things like credit card debt and car payments as low as possible. Even if you have high monthly student loan payments, if you have little other debt and a decent income, there is a great chance you will qualify to purchase a reasonably priced home.
Let’s go back to our previous example: a monthly income of $6,000 with total monthly debt of $2,350 and a resultant back-end ratio of 44%. That high of a ratio might disqualify you from qualifying for a mortgage. However, eliminating just the $300 in monthly credit card debt will bring the back-end ratio down to a manageable 39%, something that can potentially be compensated for by other factors.
The good news is that the DTI ratios aren’t all that lenders will look at. They will also consider things like your credit history, assets, income, work history and amount of down payment when deciding on your eligibility for a mortgage.
Other Factors that Impact Mortgage Qualification
Your Credit Score: Credit really matters. Your credit score is a compilation of your payment history, amount owed, length of credit history, new credit and credit mix. A higher score means a lower likelihood that you will default on any new debt you take on. I have seen lenders allow up to a 50% back-end ratio for someone with great credit. It isn’t common, but it’s possible. Keep in mind, there are also minimum credit scores to qualify for a mortgage as well. For FHA loans your FICO score must be at least 500 and with most conventional loans it must be at least 620.
Your Job History: We’ve already discussed how your income can impact your qualification (mostly in terms of how it impacts your debt-to-income ratio) but job history plays a role too. Lenders want to see steady employment because it increases the likelihood that you will continue to be able to pay your mortgage. Holding down a steady job means that you have a steady stream of income. For those of us that attended graduate school, this might be more of a limiting factor than the student loans themselves. Most lenders like to see an employment history of around one to two years but again there are absolutely exceptions to this rule.
Size of Down Payment: A larger down payment is typically much more attractive to lenders. It gives you a little bit of skin in the game so to speak because you are providing a greater initial investment into the home (this is part of why many lenders require mortgage insurance if you put less than 20% down). In addition, a higher down payment will lower your front-end ratio. If you can manage to save a 20% or more down payment, your student loans are far less likely to affect the loan process.
The Lender: It is SO important to shop around for your mortgage. Different lenders and financial institutions have vastly different standards, qualifying ratios and programs to help home buyers. You are doing yourself a MAJOR disservice to only talk to one lender. While one lender might deny to qualify you for a mortgage or give you a higher interest rate, another may qualify you with little issue. The decision could, at worst, cost you the house of your dreams, but even if you do qualify, it can cost you thousands and thousands of dollars over the life of your loan.
Other Options for Student Loans
Refinancing – Restructuring your debt through student loan refinancing may be one way to afford a mortgage loan. You may be able to qualify for lower interest rates, thereby saving money on monthly payments and lowering your DTI. You can also select a shorter repayment period if your goal is to get out of debt as quickly as possible, but this may increase your debt to income ratio in the short term. Make sure you have a full understanding of the pros and cons of refinancing before you make changes to your loans though. Many times, if you are in a federal loan program (like Public Service Loan Forgiveness), refinancing with a private lender makes you ineligible for the program.
Physician Loan Programs – May clinicians coming out of a graduate medical program will have much higher student debt ratios that typical student borrows. The great news out there is that there are physician loan programs available that allow you to qualify for loans with low or no down payment and much higher DTI than typically allowed. These programs aren’t all specific to medical doctors either. Many programs also include practitioners with a DO, DDS, DMD, DVM, PharmD, DPT, PhD, OD and JD among others. Finding a lender that is familiar with these programs can sometimes be the difference between qualifying for a loan or being denied.
Your Next Steps - Create a Plan!
Ok, now what? Well, now that you’ve calculated your debt to income ratios and gotten a little more information about what can qualify or exclude you from a home mortgage, you probably fall into one of two camps: you’re either feeling pretty good about your financial situation or you’re realizing you have some work to do. If you’re in the first group, congratulations! Time to start applying for mortgage pre-approval and seriously looking at beginning your home search. If you’re in the second, it’s time to make a plan!
If your DTI is too high, consider ways to pay down or minimize your debt. To do this, you will probably need to audit your current spending habits and try to free up some of your monthly income. Be ruthless here. Do you really need three different streaming subscriptions or that weekly (or daily) Starbucks habit? Unless you are already intently tracking your expenses, I’d be willing to bet you can find places to cut costs. Small lifestyle changes can make a big difference. If you’re super motivated to make things happen quickly, you can also look at taking on a part-time job or side hustle for some extra cash. It just depends on how hard you’re willing to push and potentially sacrifice to get yourself into a home as quickly as possible.
Have you already gone through this process? I’d love to hear about your experience and any tips or tricks you used to successfully qualify for a home loan (especially if your student loan debt is high like ours).
Have specific questions about the process? I’d love to hear from you too. While I am absolutely NOT a mortgage loan officer, my husband and I have gone through this process personally several times now. Plus, because of my medical background and job as a real estate agent, I have assisted many others in similar situations work through this process as well. I’m happy to provide any help I can, even if it is referring you to a mortgage loan officer that will be able to answer questions about your specific situation in much more detail than I will.
