When preparing for a closing on your refinance or home purchase, one of the documents you will be provided with a few days before closing is a HUD-1 Form. This form provides you with valuable information about your loan.
This is part of an ongoing series that addresses common questions from home buyers in Washington State. Today’s question is: Can I buy a house in Washington with student loan debt?
The short answer is yes, it’s definitely possible to qualify for a mortgage loan and buy a house in Washington while carrying student loan debt. But the amount of debt you have can affect your chances of qualifying for a loan.
Buying a Home in Washington With Student Loan Debt
Many Americans today have student loan debt, and the average amount per person has risen steadily over the last decade.
According to a 2017 report from the National Association of REALTORS, 46% of home buyers 36 years of age or younger who have debt reported having student loan debt with a median outstanding balance of $25,000.
Student loan debt can affect home buyers in Washington in a couple of ways:
- It can reduce a person’s ability to save money for a down payment, which is often required when buying a house.
- It can also inflate a person’s overall debt-to-income ratio, which could make it harder to qualify for a mortgage loan to buy a home in Washington.
The existence of student loan debt by itself is not a deal-breaker, when it comes to getting a mortgage loan to buy a house. It’s the amount that matters most. Specifically, banks and lenders are concerned with the amount of debt a person has in relation to his or her monthly income.
Which begs the question: how much is too much?
If you’re going to use a mortgage loan to buy a house in Washington State, your debt-to-income ratio will come into the picture. As you might have guessed, this is a comparison between the amount of money you earn and the amount you spend each month on your recurring debts.
These days, most mortgage programs set a limit somewhere between 45% and 50% for the total debt-to-income ratio. But there are exceptions to this. Based on this standard, a would-be home buyer whose combined monthly debts accounted for more than 50% of monthly income might have a harder time qualifying for a mortgage.
New Rule Could Help Borrowers Qualify for Mortgage Loans
There is some good news on this front. Recent developments might make it easier for Washington State home buyers with student loan debt to qualify for mortgage financing.
As we wrote in a previous blog post, Fannie Mae recently increased its debt-to-income ratio limit from 45% to 50%. (Fannie Mae is one of the two government-controlled enterprises that purchase home loans from lenders. Freddie Mac is the other.)
This change could increase access to mortgage financing, particularly for Washington home buyers with student loans and other forms of debt.
The Fannie Mae rule change applies to conventional mortgage loans that are not insured or guaranteed by the government. The rules for government-backed FHA home loans are similar. According to current HUD guidelines, the total or combined debt-to-income limit for borrowers is 43% in most cases. But it can be as high as 50% if there are “compensating factors” that offset the higher level of debt. So that range is pretty standard across the different loan programs.
To recap: Yes, it’s possible to buy a house in Washington State while carrying student loan debt. It’s the amount that matters most. Home buyers who have a healthy balance between their income and debts have a better chance of qualifying for a mortgage loan.