Recent changes in Federal Housing Administration (FHA) make it easier for those with student loans
to qualify for a mortgage. (Photo: Rodnae Productions/Pexels).

Tom Kalinski, RE/MAX of Boulder

Most millennials don’t own a home and almost 25% say student loan debt is the obstacle in their way, according to a 2019 Bankrate survey. More than half of college graduates carry student loans – 62% — and the average student debt loan balance is $28,950, reports the Institute for College Access and Success.

But recent changes in Federal Housing Administration (FHA) make it easier for those with student loans to qualify for a mortgage. The new policy bases the monthly payment on the actual student loan payment, which is often lower than its current basis of one percent of the outstanding student loan payment. It helps home buyers who, with student debt, meet minimum eligibility requirements for an FHA-insured mortgage.

In addition, changes made by federal mortgage lender Fannie Mae make it easier for student loan borrowers to get a mortgage. In 2017, Fannie Mae added three flexible payment solutions for future and current homeowners. With these changes, lenders can consider lower, flexible payments; homeowners can pay down student debt with a mortgage refinance; and borrowers can exclude non-mortgage debt paid by others.

“We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage, and we want to be a part of the solution,” said Jonathan Lawless, Vice President of Customer Solutions, Fannie Mae.

More help comes from mortgage experts who have strategies for student loan holders to get into a better position to buy a home. The experts say if you are consistent with making your loan payments and the amount of your payment is a good fit with your income, student loan debt doesn’t have to be a barrier to buying a home.

Student loan debt holders should pay attention to two key metrics to increase their likelihood of mortgage qualification.

One, borrowers need to consistently make debt payments on time – whether student loan, credit card, or other types of debt payments. A good payment history can help your credit score, while getting behind on your monthly bills will cause your credit score to drop.

Even though student loan plans offer the option to defer payments, experts say it’s better to steer clear of this path if you are working toward buying a home. Deferring payments can make it difficult to get loan approval. And if you are approved for a home loan, the interest rate may be higher.

And two, manage the amount of your monthly student loan payment compared to income. This is factored into debt-to-income ratio, which is used to determine your ability to keep up with mortgage payments.

One tactic some would-be homebuyers use is to lower their monthly student loan payment by extending their repayment plan over a longer period of time, or choosing a plan based on a percentage of income. If you choose to make these changes to your student loan payment, do it at least a year before applying for a mortgage.

Another option for managing debt-to-income ratio is to boost your income with a promotion or second job.

Homeownership trends show these changes are needed.

Nationwide homeownership for ages 24 to 32 fell from 45 to 36 percent between 2005 and 2014, reports the Federal Reserve. Increased student loan debt is linked to this age group’s homeownership rate dropping by 2 percentage points – resulting in over 400,000 young adults in the U.S. who didn’t own a home in 2014 because of the rise in debt.

Meanwhile, as millennials grow older and begin to start families, millennial homeownership is on the rise. In a 2021 Home Buyers and Sellers Generational Trends Report by the National Association of Realtors®, millennials made up the largest share of buyers, at 37%. And first-time buyers made up nearly a third of successful buyers.

In September 2019, millennials accounted for 46 percent of all mortgage originations – a 43% increase from a year ago. This group is expected to continue to dominate the market.

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By Tom Kalinski. Tom is the broker/owner of RE/MAX of Boulder, the local residential real estate company he established in 1977. He was inducted into Boulder County’s Business Hall of Fame in 2016 and has a 40-year background in commercial and residential real estate. For questions, email Tom at [email protected], call 303.441.5620 or visit