Everything You Need to Know about Buying a House When You Have Student Loan Debt

It's no secret that student loan debt can put a serious damper on your plans for the future, especially when it comes to buying your first home. Some studies even suggest that student loan debt will add an extra five years to the time it will take someone to save for their first home.

So, should you focus on student loans and then buy a home? Try to do it at the same time? Focus on the home first?

There are plenty of options. Here's what you should be thinking about. 

Decide if buying a home makes financial sense

Before you even consider how to buy a home when you have student loan debt, you have to figure out whether or not it makes sense financially to buy or if it's better to keep renting. 

How long will it take to save for the down payment on your first house?

If everything about your financial life stayed exactly the same, how long would it take you to save for a down payment? Let's do the math.

The median home price for a first-time buyer in 2017 is $182,500, which means you need to save $36,500 if you want to have a 20% down payment. If you want to buy your home in the next three years, you'll need to be saving $1,014 per month.

How long will it take you to pay your student loans?

If you're looking at the same three year period, how long will it take you to pay your student loans, and how much will it cost?

The average student loan debt is $28,950 at 4.29%. At that rate, you'd need to pay $858.46 per month for three years in order to fully pay them off. 

So, if you have $1,000 available to put aside each month, you have to decide what your priority is: buying a home or paying your student loan?

To do that, it helps to ask yourself some questions like:

Is it cheaper to rent or buy?

What you're really asking is will you save money by buying a home? 

Do some research into the cost of owning a home in your area and then use our rent vs. buy calculator to find out if it's cheaper to pay a monthly mortgage or monthly rent. Don't forget to factor in other expenses associated with owning a home, like your homeowner's insurance, emergency maintenance funds, and any HOA fees. 

If it's cheaper to own a home with all the associated expenses, then it might be time to start looking into options like an FHA loan or another first time home buyer program. These programs can help you become a homeowner sooner by reducing the amount of money you need for a down payment. Then you can take the money you save on rent each month and add that to your student loan payment to help pay them down faster.  

Other financial factors to consider

Like any financial decision, buying a home or paying your student loans isn't black or white. Make sure you're also able to save money for your emergency fund, which can cover any major medical bills or other unexpected expenses, and don't forget your retirement savings. 

Start planning for your purchase 

Okay, so you ran the numbers and now is the right time for you to buy, student loans be darned! Here's what you should be thinking about. 

Set a goal

Chances are you don't have a huge nest egg right out of college, so the first step in buying a home is setting a goal and then making a plan to achieve it. Take a look at sites like Zillow or Trulia to see how much homes in your area cost.  Calculate how much you would need for a 20% down payment, then use our mortgage calculator to see what your monthly payments would be and how much house you can really afford.

Once you find a sale price and monthly mortgage payment you would be comfortable with, figure out how much you need to save each month in order to save for that down payment and closing costs. 

Improve your credit

Bet you never thought having student loans would be a good thing. Well, your credit score is one area of your life that might actually benefit from your student loans. When you pay them on time, you’re proving to lenders that you can pay back your debts so it's a great way to raise your credit score.

There aren't any quick fixes when it comes to good credit, but there are a few things you can do to improve your credit score, including: 

  • Check your credit score annually
  • Fix any errors
  • Pay all your bills on time 

Decrease your debt

This number’s pretty easy to calculate. Just add up all your monthly debts (credit cards, student loan payments, car payments, etc.) and divide that by your monthly income before tax. A good number is 36 percent, but a lender might be willing to work with you up to 43 percent.

There are two ways you can lower your ratio: decrease your monthly payments or increase your income. Short of taking on a second job or asking for a raise, you don’t have a lot of control over your income.

So how do you reduce your monthly payments? Challenge every expense and see where you can save. Refinance or consolidate your loans 

Save your money

Getting on a budget isn't just a good idea when you're saving for a home--it's something every person should do when they get their first job.

Your budget will help you prioritize your bills, your fun, and your savings and help you see where you can cut your spending and save more each month. Eating out every day and weekly happy hours are tempting but trust us, crockpots are your best friend and that beer tastes just as good at home.

Be realistic about your budget

You might have a picture in your mind that looks like the home you grew up in. Or something that's the "after" picture in an episode of Love it or List it. But those homes might be out of your price range right now. And, you know what? That's ok.

Make a list of your must-haves and nice-to-haves and then sit down with your real estate agent and ask her to help you understand what you can afford to spend on a home and what that price will get you in the neighborhoods you're looking in.

Once you have a more realistic idea what to expect, you can really focus in on deal-breakers, things you can fix or upgrade yourself, and how you can see yourself growing in this home. 

Look for programs that can help

When it comes to helping first-time homebuyers reach their goals, there are a lot of programs out there—and you don't need to have student loan debt to take advantage of them. One of the biggest hurdles for first-time buyers is the initial down payment.

Many of the federal programs reduce the amount you need to put down on your home from 20% to as little as 3.5 percent. If the average cost of a home is $232,000, you'd be responsible for $8,120 on your down payment. That's $38,280 less than you'd need if you were paying the full 20%. 

There are lots of other programs out there that focus on everything from helping teachers and police officers buy a home to encouraging people to move to rural parts of the state. Check out our list of first-time buyer loan programs to find one that works for you. The city you live in might even have a local first-time buyer program.

Move to Maryland?

Maryland recently launched Maryland SmartBuy, an innovative program to help young people become homeowners and wipe out their student loan debt at the same time. The program is open to anyone who has student loan debt that ranges from $1,000 up to 15% of the purchase price of the new home. So, if you're carrying the average student loan debt that would make you eligible for a $247,813 home. 

 The program will give you up to 15% of the home purchase price to pay off your student loan debt and ask you to agree to agree to:

There are lots of other cities and states that will pay part of your student loan bill if you choose to move there. It just takes a little digging to find them all. 

Consider refinancing 

When you're looking at around $29,000 in student loan debt the difference between paying at 6 percent interest and 4 percent interest is $5,800 over the life of your loan. If you're buying a $150,000 home, that's already 3.8 percent of your downpayment! 

Refinancing any loan should accomplish one of two things. It either lowers your monthly payment or it shortens the term of your loan so you end up paying it off faster. The first goal will help you free up some money each month to put toward a mortgage or down payment and the second will help you pay off your student loan faster so you can focus all your financial energy on your mortgage. 

Remember, if you choose to lower your monthly payment, you could be increasing both the amount of time you have left on your loan and the total amount you pay on the loan. That's because the longer you're paying a loan, the more you end up paying in interest. So, while it may help you achieve your dream of owning a home, you should also think hard about whether or not if fits into your overall financial plan. 

How to refinance a student loan

There are plenty of online banks that specialize in student loan refinancing and even entire websites dedicated to helping you find the best solution for your situation. You can also check with your current lender and see if you qualify. 

Refinancing a student loan is a lot less involved than getting or refinancing a mortgage. In general, a lender will just need to know

  • Name
  • Address
  • University and degree
  • Amount of debt you want to refinance
  • Your current income
  • How much you pay in housing costs each month 

Will this affect my credit?

Credit reporting agencies want to see you making smart financial decisions and in this case, that means shopping around for the best rates. FICO gives potential borrowers a 30-day window to explore multiple lenders to find the best rate for your refinance. The same is true when you're ready to apply for your mortgage, so remember to take advantage when the time comes!

If you're in the process of getting approved for a mortgage, you should put your refinance on hold until your mortgage goes through. Remember, when you refinance you're essentially taking on an entirely different loan. And whenever you take on a new debt, your mortgage lender is going to have to start the process all over again. 

Look into student loan forgiveness 

When people are planning on student loan forgiveness, they're most commonly planning on using the Public Student Loan Forgiveness program. That's because this program isn't tied to any sort of income or hardship event, instead its goal is to support and encourage people who choose a career in public service. That includes jobs like police officers, teachers, and non-profit workers. 

To qualify, you need to have at least 10 years of experience working in:

  • A government organization (government contractors are excluded) 
  • A 501(c)(3) exempt nonprofit (religious-based nonprofits are excluded)
  • Or as a full-time AmeriCorps or Peace Corps member

Your loan has to:

  • Be a federal loan, such as:
    • Direct subsidized and unsubsidized
    • Direct PLUS loans
    • Direct Consolidation loans 
  • Have 120 on-time payments made

Want more help buying your first home? Check out our first-time home buyer education center