Mortgage Denied Due to Student Loans? Here's What to Do

Worried you’ll be denied a mortgage due to student loans? You’re not alone.

As of 2023, student loan debt in the U.S. totals $1.7 trillion, placing considerable strain on potential homeowners. Indeed, student loans can be a significant impediment to securing a mortgage, largely due to their impact on key factors like your debt-to-income (DTI) ratio and credit score.

Yet, despite this daunting landscape, emerging shifts in the 2023 housing market and evolving lending guidelines signal hope for those burdened with student debt.

In this article, we delve into the complex intersection of student loan debt and homeownership, explore the recent changes in lending policies, and provide a comprehensive overview of the current housing market.

We’ll also discuss why student loans can lead to mortgage denials and what steps you can take to improve your chances of homeownership despite your student debt.

What to Do If You Were Denied a Mortgage Due to Student Loan Debt?

If you’ve been denied a home loan because of student loan debt, including federal student loans or private student loans, don’t lose hope. There are several strategies that can help improve your chances of pre-approval on your next application:

• Understand the Reason for Denial: During the underwriting process, lenders are legally obligated to provide a specific reason for your mortgage application denial. If high student loan debt is the problem, it’s likely impacting your Debt-to-Income ratio, which is a critical metric lenders use to assess your ability to manage monthly debt payments, such as a mortgage payment.
• Lower Your DTI Ratio: Your DTI ratio is the percentage of your gross monthly income that goes towards paying debts, including student loans, auto loans, credit card debt, and other financial obligations.To enhance your chances of securing a conventional loan or other types of loans: (1) Increase your income: Seek opportunities for a higher-paying job, a second job, or freelance work; and (2) Decrease your debt: Pay off smaller debts, make extra payments on your student loans, or consider refinancing your student loans for a lower monthly payment.

• Adjust Your Student Loan Repayment Plan: If you’re on an Income-Driven Repayment Plan like Income-Based Repayment (IBR), and your payment is $0, consider getting a non-zero payment. This allows your lender to use this amount for the DTI calculation during the underwriting process.
• Improve Your Credit Score: A robust credit history can counterbalance a high DTI ratio. Improve your credit score by paying all your bills on time, keeping your credit card balances low, and avoiding new credit accounts unless necessary.
• Consider Different Loan Types: Different types of loans come with varying requirements. Government-backed loans, like FHA or VA loans, often have more lenient lending requirements, which may be beneficial if you’re struggling with student loan debt.
• Consult with a Credit Counselor or a Financial Advisor (NMLS certified): Personal finance professionals can provide tailored advice, helping you devise a plan to improve your chances of loan approval, even in the context of potential student loan forgiveness programs.
• Consider Finding a New Lender: Not all lenders or mortgage brokers keep up-to-date with changes in lending regulations, which have been evolving especially in the Biden administration and throughout the pandemic. If your loan has been denied, consulting with another lending professional who holds an NMLS certification could offer a fresh perspective or approach to your situation.
• Reapply: After you’ve taken steps to better your financial standing, don’t hesitate to reapply for a home loan. The goal is to prove to lenders that you can consistently handle the loan amount and make your mortgage payment on time.

Remember, a denial is not a permanent roadblock but an opportunity to reassess your financial state and make necessary improvements.

With patience, persistence, and well-informed financial decisions, you can navigate the real estate market, manage your closing costs, and make a down payment on your dream home, overcoming the hurdle of student loan debt.

Mortgage broker reveals secrets to secure a mortgage despite high student debt.