Paper cutout couple with house and car, with financial related cloud messages

How Student Loans Affect Mortgage Eligibility

October 11, 2019

A college education is associated with increased earnings, fewer periods of unemployment, and greater job satisfaction.1 However, paying for college without incurring debt remains a challenge. Tuition, fees, and living expenses often surpass the amount set aside in college savings plans or available through federal and state grant programs. For many students, scholarship opportunities are limited, leaving loans as the only source of financial aid available. Attending college and avoiding student loan debt has become nearly impossible.

You can relate. Student loans covered the majority of your college expenses. Now, you’re out of school and thinking about buying your first home. In a recent study, 83 percent of millennials believed that their student loan debt affected their ability to buy a home2. Let’s explore whether that belief has any validity.

What’s Your Debt-to-Income Ratio?

Student loans are only part of the equation when mortgage lenders review your financial situation. The calculation also includes other debts, such as car loans, personal loans, and credit cards. Debt obligations are only one half of the equation. Your income is the other half. Lenders calculate your debt-to-income (DTI) ratio to determine how much additional debt makes sense for your finances. While not the only consideration, this figure weighs heavily in the decision to approve or deny a loan application.

Mortgage loan lenders may differ in how they calculate the DTI ratio. But, most will either use your annual or monthly gross income and compare it to your total debts or total minimum monthly debt payments to arrive at the figure.

Here’s a sample DTI calculation using annual gross income.

(For illustrative purposes only)

Harry Homeowner has an annual gross income of $60,000. Besides his student loan, Harry has a personal loan, auto loan, and several credit cards with high balances. His debts total $30,000. Harry’s DTI is 50 percent.

 Maximum acceptable DTIs vary by lender. However, many prefer to see DTI’s of less than 36 percent to be eligible for loan approval. For Ephrata National Bank, a borrower with a good credit history a DTI of 43% is acceptable. This figure must account for all debt obligations, including the expected mortgage payment.

Do Deferred Loans Still Count Against DTI?

Typically, yes. If your loans are in deferment, most mortgage programs require the lender to make an assumption that your payment will be 1% of the balance on your loans. However, if you can provide documentation that shows what the actual payments will be once it comes out of deferment, the lender will typically use that instead. There are also some specialty mortgage programs available where student loans that are deferred for more than 12 months may not need to be calculated against your DTI.

How to Improve Your DTI

If your DTI exceeds the desired threshold, there are several actions you can take to improve your number. Increasing your income and paying down or eliminating your debt are the most direct ways to improve the ratio. When you increase your income, there should be an immediate improvement in your DTI.

It’s possible to reduce your student loan debt by refinancing or consolidating your student loans. Combining several student loans into one lower interest rate loan can result in a faster payoff. As a result, student loan borrowers can improve their DTI, as long as they don’t add any new debt.

Student loan debt doesn’t have to put the brakes on mortgage loan approval. Let Ephrata National Bank help with an iHelp Student Loan Consolidation*. Contact us at (877) 773-6605 to learn more about how student loan consolidation can benefit you and get you into your first home at a quicker pace. We can also discuss which of our First-Time Homebuyer Mortgages might be the best fit for your financial situation.

*Paying off any federal student loans with a private loan means you’ll no longer have access to any federal student loan repayment benefits.

1The Hamilton Project, Lifetime Earnings by Degree Type,

U.S. Bureau of Labor Statistics Employment Projections,

Pew Research Center, How Americans View Their Jobs,

2 National Association of Realtors®, Student Debt Delaying Millennial Homeownership by 7 Years