Whether you’re house hunting in Chicago or Atlanta, student loan debt can feel like a major hurdle for many aspiring homeowners. You may be wondering whether you should pause your home buying plans and focus on eliminating debt first, or whether it’s possible (and wise) to pursue both at the same time.
Some buyers benefit from aggressively paying down their student loans before purchasing a home, while others are in a strong enough financial position to do both. Understanding how financial institutions view student loans and how it affects your own financial security will help you make the right decision.
Should I pay off my student loans before buying a home?
Short answer: not always
You don’t have to pay off your student loans before buying a home. In fact, there are many people who have successfully purchased a home despite having student loans. The most important thing is not whether you have debt, but how well you manage it.
Lenders look at your overall financial profile, including:
So the better question is, “Will my student loans make it harder for me to qualify for a mortgage, or will I be able to afford one?”
Paying off student loans first may be the right choice.
While it’s not always necessary to eliminate student loans before buying a home, there are some situations where doing so can improve your financial situation.
If your monthly student loan payments are high relative to your income, it can push your DTI ratio beyond what your lender wants. In this case, paying off the balance or canceling the loan can increase your borrowing power and potentially help you get better mortgage terms.
There is also the issue of ease of monthly payments. Even if you’ve been pre-approved for a mortgage, combining a mortgage with large student loan payments can put a strain on your budget. Mortgage rates change weekly, so understanding them is important to understand your monthly affordability. Homeownership comes with additional costs beyond the mortgage, such as maintenance, property taxes, and unexpected repairs. Reducing your debts in advance will make it easier to manage your expenses.
“Paying down debt while saving for a home is easy,” asserts James Hendrickson of BloggingAwayDebt.com. “Aim to keep your debt-to-income ratio below 36%, so lenders will consider you eligible for a mortgage while still carrying student loan debt. Then, save like crazy and build your credit as much as possible. Finally, consider whether you really want to do two things at once. Having multiple goals that conflict with each other is usually a good way to accomplish nothing. So, depending on your situation, decide if you want to pay off your student loan early or buy it early. If you can’t afford it, then focus on paying it off.”
When it makes sense to buy a home with student loans
On the other hand, waiting until your student loans are fully paid off can delay homeownership by years, especially if you have a large balance or are on a long-term repayment plan. If your income is stable and your student loan payments are manageable within your budget, you may already be in a good position to buy. Lenders are often willing to work with borrowers with student loans as long as their DTI ratio is within an acceptable range and they have sufficient savings.
“Managing student loan debt doesn’t have to be a barrier to homeownership, but you should think strategically about your debt-to-income ratio,” explains Bruce McCrary of the National Credit Counseling Foundation. “If you’re on a deferred or income-driven repayment plan, lenders typically use a percentage of your balance to estimate your monthly payments, so it’s important to provide documentation of your actual monthly payments to ensure the most accurate calculation. Reducing other revolving debt and maintaining a solid credit score can often offset the impact of student loans and secure competitive mortgage rates.”
In fact, keeping your student loan payments on time can help you build a credit history. A high credit score increases your chances of securing a favorable mortgage rate, saving you money over the life of your loan.
Cost of waiting to purchase
One aspect that is often overlooked is the potential downside of delayed homeownership. Paying off student loans can improve your financial situation, but waiting too long can come with its own costs. Home prices and interest rates fluctuate and often trend upward over time. If you wait several years to buy, you could end up paying more for the same home or facing higher borrowing costs. Additionally, renting during that time doesn’t build equity, which is one of the long-term financial benefits of homeownership.
That doesn’t mean you should rush out and buy, but it does emphasize the importance of weighing both sides of the equation.
find a balanced approach
For many buyers, the most practical strategy isn’t choosing between paying off student loans and owning a home. It’s about finding a way to achieve both goals at the same time.
“Buying a home while managing student loan debt can be daunting, but it is absolutely possible with strong financial fundamentals,” Joel Ballezza details BECU. “I bought my first condo in North Seattle in my 20s, while taking on over $60,000 in student loans by keeping other consumer debt low, maintaining a solid credit score, and staying within a realistic budget. The trick is, there’s no special trick. Buyers improve their chances by understanding their debt-to-income ratio early, reviewing and understanding their credit report, and preparing their financial situation well before applying.”
“While this goal may seem daunting, the same habits that help you achieve most financial goals will work when buying your first home while paying off college debt. This includes paying off debt with the highest annual interest rate first, creating a realistic budget, living within your means, and having a plan,” Barezza continues. “I find it helpful to review all of your monthly expenses and identify areas to cut back on (like vowing to quit coffee shop drinks forever). These are tools I’ve used to make my dream of homeownership a reality. Also, don’t forget to save for moving costs, furniture, and possibly repairs to your new home. These should be accounted for after you secure a loan and get an offer.”
This balanced approach allows you to improve your financial situation without putting your homeownership plans on hold indefinitely.
make the right decision for you
Ultimately, your personal financial situation and comfort level will determine your decision. Before proceeding, it’s worth asking yourself some important questions.
Can I comfortably pay my mortgage along with my current student loan payments? Is my debt-to-income ratio within the range typically accepted by lenders? Do I have enough savings for a down payment, closing costs, and emergencies? Am I financially prepared for the ongoing costs of homeownership?
“You can use student loans to buy a home, but your approval will depend on how your monthly payments fit into your overall budget,” emphasizes Kady Ambus of Earnest. “Lenders are looking at your debt-to-income ratio (DTI), which is determined by your monthly payments, not just your total balance. Understanding how your loan is calculated and potentially reducing your payments through strategies like refinancing increases your chances. The goal is not just to get approved, but to make sure your payments are sustainable.”
Your answers and early consideration can help clarify whether now is the right time to buy, or whether you’ll be in a better long-term position by focusing on paying off your debt first.
