For many first-time homebuyers in California, the mortgage qualification and approval process is one big…
Can I qualify for a mortgage loan in California if I have student loan debt outstanding? How does this kind of debt affect me during the mortgage loan approval process?
These are common questions among California home buyers who have used student loans in the past and still carry a balance. And the short answer is yes, it’s entirely possible to qualify for a mortgage loan in California (or elsewhere) with student loan debt still outstanding.
A home buyer with decent credit and sufficient income could qualify for a home loan in California, even if they have a significant amount of student loan debt.
It mostly comes down to how (A) much debt you currently have across all of your accounts, and (B) and how your income stacks up against it. If your income is sufficient to cover a monthly mortgage payment on top of your other recurring debts, there might not be any obstacles whatsoever.
Getting a Mortgage in California with Student Loan Debt
Student loans have been in the news a lot lately, and for good reason. The Biden administration recently announced the federal government would be forgiving up to $1 billion in student loan debt for borrowers who might have been the victim of fraud or deceptive advertising.
That’s good news for those borrowers who qualify for this new debt-forgiveness program. But what about everyone else? How does your student loan debt affect you when qualifying for a mortgage in California? Is it possible to buy a home if you are still paying off your student loans?
Here’s what you need to know:
When you apply for a home loan, the bank or mortgage lender will review your entire financial picture. They’ll pay particularly close attention to your current income and existing debts. If you’re doing a good job managing your debts, and they don’t use up too much of your income, you could still qualify for mortgage loan in California.
To state it differently, student loan debt by itself will not necessarily disqualify you for a home loan. It’s the amount that matters most. An excessive amount of debt (relative to your income) could present problems.
But a more manageable debt load doesn’t necessarily prevent a person from qualifying for mortgage financing. In fact, it could even help in certain scenarios.
Student loan debt can affect you in several ways, when applying for a mortgage loan in California. It can have an impact on your credit score, which in turn can affect your ability to qualify for a home loan. It also influences something known as the debt-to-income ratio, or DTI.
Credit Score Considerations
One way your student loan debt can affect you has to do with your credit score. These three-digit numbers are based on information found within your credit reports, which in turn are based on your financial activity.
Your payment history makes up the largest part of your credit score. The short version is this: repaying all of your debts on time can boost your credit score, while missing payments can lower it.
This is where student loan debt comes back into the picture.
When you apply for a mortgage loan California, your lender will review your current debts. This will include any recurring balances you pay each month, for things like credit cards, auto and student loans, and other forms of debt.
If you’ve done a good job of repaying your student loan, it could actually have a positive effect on your credit score. A high score shows that you are a low-risk borrower, based on your previous borrowing habits, and could help you qualify for a mortgage loan.
On the other hand, a person who regularly misses loan payments will end up with a lower credit score. As you might have guessed, this can hurt your chances of getting a mortgage loan in California or anywhere else.
Fortunately, you can check your credit scores yourself to see where you stand. You can also check your credit reports once per year, at no cost. The official website for obtaining your free credit reports is annualcreditreport.com.
Understanding the DTI Ratio
The amount of money you owe on your student loans can also affect your debt-to-income ratio. The DTI ratio is simply a comparison between the amount of money you earn via your income, and the amount you pay out each month toward your recurring debts.
The goal here is to ensure that you are not taking on too much additional debt, by using a mortgage loan to buy a house. That wouldn’t be in anyone’s best interest.
The DTI ratio includes things like credit card balances, car loans, student loans, and any other recurring debt that you pay on a monthly basis. If this ratio rises above a certain level or threshold, it could make it harder to qualify for a mortgage loan in California.
There is no hard-and-fast rule as to how much debt a person can have, because there are many compensating factors and circumstances. But generally speaking, a borrower with a debt ratio that exceeds 50% could have a harder time getting a home loan.
That number is not written in stone. Exceptions are sometimes made for borrowers who are otherwise well-qualified to take on a mortgage. But it’s something to consider. This is just one of the ways student loan debt can affect you when applying for a mortgage loan in California.
Let’s Explore Your Financing Options
Located in the San Francisco Bay Area, Bridgepoint Funding serves borrowers all across the Golden State. We work with various lenders, in order to offer a broad range of financing options to our customers. Some of those programs are fairly flexible, when it comes to credit scores and debt-related issues.
Please contact us if you would like to find out if you qualify for a mortgage loan in California with your existing student loan debt. Our knowledgeable loan officers can review your financial situation and and let you know where you stand, in terms of financing.