Is it smart, or even possible, to get a mortgage while paying off student loans? Buying a home is a big investment, but can also provide big benefits. The good news is, there are many options and resources available to manage your student loans and buy a home at the same time – if that’s the right decision for you. The key is to look at the big picture now, make informed choices and follow through.
The big picture
Student debt can be intimidating, whether you’re a brand-new grad or a few years into your repayment plan. And you’re not alone. According to Forbes, you are 1 of 44.2 million others contributing to $1.52 trillion of student debt nationwide.
Paying off your loans isn’t an overnight process, but when you take it one step at a time, you’ll feel more financially confident and secure. Successfully managing your student loans makes becoming a homeowner a much easier choice, if that’s among your goals. The first step is figuring out how your repayment plan fits into the big picture.
Student loan repayment plans
In terms of repayment, the 2 main variables for any student loan are the loan term and the minimum monthly payments. Generally, when the loan term is shorter, the minimum monthly payments are higher, and vice versa.
There are 2 main programs for student loans:
- With a federal loan, the government acts as the lender. Repayment is deferred until at least graduation, and interest is locked at a fixed rate. You can change your repayment plan at any time, which can help you meet your changing financial obligations
- With a private loan, a bank acts as the lender. Some private loans require payment while you’re still in school. Your interest rate depends on your credit score and may change over time. Private loans generally have fewer repayment plan options and you may only be able to change your repayment plan under specific circumstances (if you have a private loan, ask your lender about those guidelines)
They each have their merits, but most students choose a federal loan for their student loans. See our Get Ready guide on student loans for more about federal repayment plans.
Student loans and credit
Establishing credit is crucial to obtaining a mortgage. The higher your credit rating, the easier it will be to obtain a mortgage.
The good news? Student loans build credit. Only a third of millennials carries a credit card; but lenders are wary of would-be borrowers without much credit history. Fortunately, paying off your student debt will help you establish and build up your payment history, which raises your credit score. Along with staying on top of your student loans, using your credit card wisely and making consistent on-time payments will also boost your credit rating.
To make sure your student loans are helping and not hurting your credit score:
- Don’t miss loan payments. While having a loan will help your credit, missing any payments will do the opposite. Your lender will report any late payments to the 3 major credit bureaus, which will be reflected in a lower credit score, hurting your chances at being granted a mortgage in the future
- Set up an automatic payment. Doing so will give you a security blanket so you won’t have to worry about missing a payment
- Avoid defaulting on your loan! Defaulting will essentially destroy your credit and be noted on your credit report for 7 years. You may no longer be eligible for new loans or grants. The government can also seize tax refunds, take a portion of any Social Security payments, and generally, make your life more difficult
Ask for help if you need it
If you are unable to make your monthly student loan payment, the best thing you can do is contact your lender immediately. The last thing you want to do is default on a loan, and there are ways lenders can help – but the only way to get help is to ask for it.
Go to studentaid.ed.gov for more information about deferment and forbearance, which could allow you to temporarily reduce or even stop your federal student loan payments under certain circumstances.
Can you get a mortgage if you have student loans?
A student loan is treated like any other installment debt, similar to a car loan. It’s normal that someone looking for a mortgage may have other loans. What’s important is establishing a good payment history that shows you’re responsible with your finances every month.
Talk to a loan officer to see what options you have. If you have a good payment history and sufficient funds, then having a student loan could actually help rather than hurt your chances of being approved for a mortgage. The loan officer will also give you an idea of how much you can afford.
Is a mortgage right for you?
You feel confident in managing your student loans, but what about adding a mortgage?
The most obvious, of course, is that you’ll be adding a monthly mortgage payment to your expenses. Even if it ends up being similar to (or even less than) what you would pay to rent, it’s important to remember you’re paying back a debt instead of just paying for a place to live. Once you have a mortgage, if your circumstances change and you need to reduce expenses, moving to a smaller, cheaper place will be a more difficult proposition.
If you end up changing your student debt repayment plan to one with lower monthly payments to help you afford a mortgage (assuming you can do so based on what kind of loan you have), it may result in a longer loan term and more total interest. That would mean you’d be living with your loans longer, resulting in less discretionary spending money. You may have to think twice and look at your budget before buying that new TV or taking a trip.
Finally, when you’re crunching the numbers, remember that owning a home comes with costs beyond the monthly mortgage payment. It’s important to make sure you save enough to pay for additional expenses, like maintenance and repairs.
People have all kinds of reasons for wanting a home – the stability, the privacy, the freedom to make changes and improvements, space for family or pets, or just longing for a place of their own. If you wait to buy a home until you’ve paid off your student loans, you’ll have to wait to enjoy those benefits, tangible and intangible.
There are financial benefits, too. You’ll also be building your equity and wealth as you continue to pay your mortgage. If you’re planning on having a family, or already have one, the long-term benefits of having a home can be substantial. Years down the road, if you’re looking to move, you may be able to sell your home for more than you paid, helping you afford a nicer or larger home.
Taking out a mortgage is a big decision, and it isn’t one that someone else can make for you. It all depends on your priorities and a variety of personal factors. Take your time, consider all options and be honest with yourself.
- Decide where homeownership fits with your priorities. Make your own personal list of the pros and cons of homeownership. How important a mortgage is to you will influence how you repay your student debt. If you want to become a homeowner, are you willing to wait a few years, or do you want to get a mortgage as soon as possible?
- Consider how your student debt repayment plan affects your goals. Visit studentaid.ed.gov to explore your options
- Get a credit report. Your credit score will determine what sort of mortgage you may be eligible for, and a credit report will help you understand your financial footing and whether you may need to do some work to improve it. You can get a free credit report from each credit agency once a year at annualcreditreport.com
- Talk to a loan officer. They’ll be able to help you understand your options. Be prepared to share information about your current income, credit score, and current or potential student loan repayment plans