Can student debt relief help you buy a house? Experts weigh in

Could Biden’s debt relief plan help home buyers?

Student loan debt can be a big burden for home buyers, delaying plans and even causing some to put off homeownership altogether. But the Biden Administration’s student loan forgiveness may offer some relief in the face of rising housing costs.

Reducing — and possibly erasing — debt loads through this grant program will improve debt-to-income ratios for many borrowers. This could help turn more renters into homeowners in the coming years.

Borrowers can now apply for student debt relief

On Oct. 17, the White House officially released the application for President Biden’s student loan forgiveness program.

The policy — first announced in August — is a three-part plan that can forgive up to $20,000 in student loan debt for low- and middle-income borrowers. To qualify, your annual income in both 2020 and 2021 must have been under $125,000 as an individual or under $250,000 as a family. Applications will be open until Dec. 31, 2023.

How student debt affects home buying

A key measure lenders use to determine if a borrower qualifies for a loan is debt-to-income (DTI) ratio. DTI compares your monthly debt payments to your gross monthly income and shows whether you can afford to make your mortgage payments.

Because DTI calculates your monthly financial burden, it also gives you an idea of how much home you can afford. While several factors determine mortgage eligibility, lenders have set DTI limits for borrowers. Those ratio limits vary by loan type:

• Conventional loan: Up to 43% typically allowed (36% is ideal)
• FHA loan: 43% typically allowed (50% is possible)
• USDA loan: 41% is typical for most lenders
• VA loan: 41% is typical for most lenders

Student loan debt caused 51% of all borrowers to put off or delay purchasing a home in 2021, according to a National Association of Realtors survey. Further, about 25% of all recent home buyers and 37% of first-timers had student loan debt, with an average amount of $30,000.

If you feel like debt is holding you back from homeownership, could Biden’s student loan relief plan make a difference?

Will student debt relief make a dent? What the experts think

The Biden Administration’s program is expected to provide millions of student loan debtors with financial relief. Many then wonder what the quantitative effect of reduced debt loads will be on home buying.

“It may [have a bigger impact] in a year or more when households have been able to move forward their home buying timeline by having less debt outstanding.”

–Taylor Marr, deputy chief economist at Redfin

We asked a trio of housing industry experts for their opinions on the matter. While certainly helpful for those seeking debt aid, the impact on the real estate market could be minimal. Here’s what they had to say:

Odeta Kushi, deputy chief economist at First American

“According to the White House, the plan will provide relief to up to 43 million borrowers, including canceling the full remaining balance for roughly 20 million borrowers.

For potential home buyers who are on the margin, the debt relief could allow them to use the money that was going to student loan debt to save up for a down payment. It may also offset some of the affordability loss from rising mortgage rates because what once was a student loan payment can become part of a mortgage payment.”

Taylor Marr, deputy chief economist at Redfin

“I don’t think that student loan forgiveness will have much of an impact on home buying. Buyers have already had their payments frozen for some time now, and they have been able to either pay down loans or build up savings.

Lenders also have been able to make adjustments in handling student loans for borrowers before this plan was in place, meaning the net benefit is likely to be fairly small. It may, however, have a slightly bigger impact in a year or more when households have been able to move forward their home buying timeline by having less debt outstanding.”

Rick Sharga, president and CEO at CJ Patrick Company

“While the student loan forgiveness act might help a few people move from renter to buyer, it’s unlikely we’ll see that happen in large numbers. For borrowers whose debt will be substantially wiped out, they probably could have qualified for a mortgage even with that debt.

For borrowers with six-figure student loan debt, the $10,000 forgiveness probably won’t be enough to move the needle. The debt forgiveness could remove a psychological barrier for some borrowers who were vacillating between trying to buy a home and paying off more of their student loan. But again, I doubt that the number of people this influences will have a material effect on overall home sales.”

Student loans shouldn’t stop you from buying a home

If you don’t qualify for the federal student debt relief program or it only makes a minimal impact, you can still get a mortgage and purchase property.

Lenders have flexibility in their underwriting. They may be forgiving about student loan payments, especially if other aspects of your loan application — like your credit score and down payment — are strong. Lenders can even reduce the amount of student debt they consider if you’re in a deferred payment plan or income-driven repayment plan.

“You absolutely can buy a house with student loan debt,” mortgage expert Ivan Simental said on an episode of The Mortgage Reports Podcast. Simental advises that prospective home buyers with student loan debt reduce their DTI by paying down smaller loans, keep their card balances low, and increase their credit scores as much as possible.

You can learn more about how to buy a house with student loan debt here.

The bottom line

Only time will tell how student debt relief will help home buyers. It’s possible that the impact could be minimal since buying a home and paying off your loans from college aren’t mutually exclusive.

If you want to buy a house but don’t know whether you qualify because of student debt, speak to a lender. Even if your ratio is above the typical limit, there may be exceptions or another mortgage type that better suits you.