Millennials now represent a significant share of first-time homebuyers. According to a March 2022 report from the National Association of Realtors (NAR), “Millennials now make up 43% of home buyers – the most of any generation.” This represents a stunning 37% year-over-year increase from 2021 to 2022. Despite this increase, more than a third of Millennials in the United States say crippling debt continues to prevent them from owning a home. Millennials carry more student loan debt than the average American – according to Huileng Tan in a recent article for Business Insider. Tan writes that “US student loan debt averaged about $28,400 in 2020…but millennials averaged even more — around $38,877.” With years to go until their balances are paid off, many Millennials doubt they qualify for a mortgage loan without co-applicants. Those who believe they could qualify for a home loan anticipate high interest rates and other unfavorable terms. In this post, we answer the often asked question “can you get a mortgage with student loans?” Whether in good standing, deferment or default, follow below to learn all you need to know about applying for a mortgage with student loans.
Student Loan Debt, Income and Homeownership by Generation
Between federal student loans and private student loans, borrowers in the United States owed a total of $1.75 trillion in 2022. Millennials are most likely to owe, but Gen X-ers owe the most. While payments related to student debt obligations were paused during the COVID-19 pandemic, borrowers are now expected to resume monthly debt payments. For many Americans, student loan payments are several hundred dollars each month.
According to Brianna McGurran and Alicia Hahn in a recent article for Forbes, the typical monthly payment “among borrowers who were actively repaying their loans in 2019 was between $200 and $299.” The Federal Reserve reports an average monthly student loan payment of $393. Of course, the amount one pays each month depends on their specific repayment plan, minimum monthly payment, interest rate, total student debt and income. Here’s how much the average Gen Z, Millennial, Gen X and Baby Boomer borrower owes and how many of each generation are homeowners.
Members of Generation Z are between the ages of nine and twenty-four. As such, the lion share of Gen Z-ers have neither attended nor graduated from college. According to Nicolas Vega in his article “Here’s the average amount of debt Gen Zers have” for CNBC’s Make It, Gen Z-ers between 18 and 23 years old carry an average $17,338 in student debt. This amounts to about 7.4% of our national student loan debt.
Keep in mind that many Gen Z borrowers are either still in school or still within their “grace period,” so their monthly payments are lower on average despite sizable balances. In an article for GoBankingRates.com, Cynthia Measom notes that the median annual earnings for Gen Zers aged 16 to 19 years old is $26,988.00 while the median annual earnings for those between 20 and 24 years old is $33,800.00. Gen Z-ers currently make up just 1% of homeowners in the United States.
The Gen Y or Millennial generation is aged 25 at its youngest and 40 at its oldest. According to Kristen Bialik and Richard Fry from the Pew Research Center, 67% of Millennials attended college, while 39% have a bachelor’s degree or higher. Only 29% of Gen X-ers and between 24 and 25% of Baby Boomers hold a bachelor’s degree or higher educational award. In 2018, Millennials who were employed full-time and held either a bachelor’s degree or higher award made a median income of $56,000. Millennials with only some college experience, however, made far less.
Student Loan Debt
Though the average Millennial owes less than the average Gen X-er in student loans, this burden increased 3.5% year over year between 2020 and 2021. According to a recent survey from Experian, Millennials had an average student loan debt balance of $38,877 in 2020 and an average balance of $40,247 in 2021.
As mentioned above, the share of homeowners who are Millennials and the share of Millennials who own homes rather than rent is growing. According to Jack Caporal in a September 2021 article for The Ascent, Millennials account for 37% of homebuyers [and] over 50% of new mortgages.” Still, only a measly 17% of all US homeowners are from the Millennial generation – meaning they lag behind other generations. Caporal writes that “42% of millennials were homeowners at age 30, compared to 48% of gen X and 51% of baby boomers at the same age.”
Members of Generation X are between 41 and 56 years old. According to the Pew Research Center, 57% of Gen Xers have at least some college experience, with 29% boasting a bachelor’s degree or higher. College-educated Gen X households made slightly more than Millennial households when earnings were taken at the same age (between 25 and 37 years old). Today, the average Gen X household makes more money each year than the average Millennial household at $113,455. However, Gen X-ers are in “the prime” of their working life and are more professionally advanced than their Millennial counterparts.
Student Loan Debt
While Millennials have the highest rate of college attendance, they do not have the largest amount of student debt. Gen X-ers have the highest average student loan balance, at $45,095 in 2020 and $46,317 in 2021. The same Pew Research Center survey referenced above found that “the median amount of debt was nearly 50% greater for Millennials with outstanding student debt ($19,000) than for Gen X debt holders when they were young ($12,800).” With children in college or recently graduated, however, Gen Xers currently have higher average student loan balances than Millennials.
According to the US Census Bureau, 69% of Gen X-ers were homeowners in 2021. Last year, Gen X-ers made up just 24% of buyers – which makes sense given a majority are already homeowners.
The oldest generation on this list, Baby Boomers are between fifty-seven and seventy-five years old. About 67% of Baby Boomers between 65 and 75 years old have already retired from the workforce. Because of this, we will reference retirement savings in addition to income. As far as income goes, there is a more significant wage gap between the college-educated and those with no college education amongst Millennials and Gen X-ers than there was amongst Baby Boomers.
According to the Pew Research Center, early Boomers and late Boomers both had a narrower gap between the average income of college graduates and those without a college degree than Americans in Gen X and Gen Y. According to Kristin Bialik and Richard Fry in their article “Millennial life: How young adulthood today compares with prior generations” for the Pew Research Center, “Millennial workers with some college education reported making $36,000” between the ages of 25 and 37. At the same age, early Baby Boomer workers without college degrees made $38,900 in 1982.
Today, Boomers continue to make more than Millennials. In a 2018 article for Business Insider, Andy Kiersz notes that “older Americans tend to have a higher income than younger Americans.” Kiersz writes that “the median millennial made less money than the median Gen Xer or baby boomer…in all 50 states and Washington, DC.” In most states, Baby Boomers also out-earned their “Gen X counterparts.” In California, for example, the typical Millennial worker made $40k in 2017 while the typical Gen X-er made $60k and the typical Baby Boomer made $61.4k. As of early 2022, the median retirement savings amongst Baby Boomers was only $202,000.00.
Student Loan Debt
According to Experian, Baby Boomers had an average student loan debt balance of $40,512 in 2020 and $42,351 in 2021. This represents a 4.5% increase between the two years. Baby Boomers have some of the highest student loan balances when compared to other generations because their adult children are either college-aged or have recently graduated from university. Some Baby Boomers and Gen X-ers are still paying off the student loans of children who graduated decades ago.
In his article “U.S. Millennials: Home Ownership And The Growing Chasm Between Aspiration And Reality” for Forbes, Nigel Wilson notes that Baby Boomers enjoy a homeownership rate of 77.8%. In 2019, Baby Boomers owned almost $13.5 trillion in residential real estate and almost a third of the entire nation’s real estate value – according to the Berkeley Economic Review and The Washington Post. Despite their outsized share of US real estate, Baby Boomers make up just 21.45% of the United States’ total population.
Can I Get a Mortgage Loan with Student Loan Debt?
1 out of every 8 American adults and 65% of recent college graduates have student loan debt. According to Daniel Kurt in a 2021 article for Investopedia, “nearly one-third of all American students now have to go into debt to get through college.” Still, college graduates tend to have higher incomes than those who did not graduate college, and homeownership remains strongly tied to education. While student debt delays homeownership, Housing Wire’s Kelsey Ramírez writes that college graduates are “43% more likely to buy a home than high school graduates” who did not attend college.
Though the number of all-cash offers skyrocketed in 2021, most US home buyers – many of whom are also student loan borrowers – took out a mortgage last year. According to the 2021 Home Buyer and Seller Generational Trends report from the National Association of Realtors (NAR), 87% of all home buyers financed their purchase. 97.5% of Millennials and 93% of Gen X-ers applied for a home loan. Between 54 and 78% of Baby Boomer buyers – who were most likely to already own a home in 2021 – also applied for a mortgage. In this section, we explain how mortgage lenders and underwriters look at your monthly student loan payments and outstanding student loan balance when considering home loan applications. As you will see below, the maximum debt to income ratio varies from mortgage lender to mortgage lender.
How Lenders Look at Student Loan Debt
As outlined above, millions of Americans have student loan debt, and many pay $400 or more each month. Despite this, CNBC writer Annie Nova notes that “‘mortgage companies will still evaluate these outstanding debts while making their decision to approve or deny borrowers’” with student loans in her article “How to buy a house despite student debt.” From student loan debt to credit card debt, a mortgage lender will consider most types of debt when determining whether to grant home loans to applicants.
They also consider your gross monthly income, credit score and employment history. How much you have for a down payment and how much you make each month will influence the amount lenders believe you can afford as a monthly mortgage payment. In most cases, your current debt-to-income ratio will have a major impact on your mortgage loan application’s viability.
Debt to Income Ratio
Those who have yet to apply for a home loan might not have heard of the term “debt-to-income ratio.” In their article “Can I Buy a Home If I Have Student Loan Debt?” for Forbes, Kat Tretina and Brianna McGurran explain. Tretina and McGurran write that your debt-to-income ratio or DTI is “the total amount of monthly debt payments you have divided by your gross monthly income.” If your income increases while your monthly debt payments remain the same or decrease, your DTI will appear more favorable to lenders. When calculating your DTI, lenders do not consider your overall debt, but rather your minimum monthly payment for each type of debt. Writing for Rocket Mortgage in her article “What To Know About Getting A Mortgage While You Still Have Student Loan Debt,” Victoria Araj notes that not every recurring monthly payment will impact your DTI.
According to Araj, underwriters consider your “minimum credit card payments, monthly student loan payment, auto loan payments [and] personal loan payments” when calculating your DTI. They also factor in “court-ordered back taxes, alimony or child support payments.” In their article for Forbes, McGurran and Tretina note that most lenders require applicants to have a “max debt-to-income ratio [of] 43% or less” after adding a monthly mortgage payment to the mix. When it comes to your debt-to-income ratio, FHA lenders and other government programs like those sponsored by the USDA and VA tend to have looser requirements than conventional loan providers.
DTI Requirements by Lender
Different lenders set different DTI requirements, but most do not exceed 43%. In his article “Student loan guidelines for getting a mortgage” for Bankrate, Erik J Martin elaborates. According to Martin, the Federal Housing Administration or FHA “prefers a 43 percent or lower DTI ratio.” FHA loan providers “can be more flexible if you have extra cash reserves and higher credit scores.” The VA allows a maximum DTI of 41%, but does not require you to include your student loan payment if payments will be “deferred at least 12 months after the date your VA loan closes.” USDA lenders also prefer a 41% or lower DTI.
Conventional mortgage lenders have a slightly different set of student loan guidelines. The conventional loan debt-to-income ratio usually maxes out at 45% for loan approval, but the way your student loans factor into that ratio differs. Martin writes that if “your credit report lists your monthly student loan payment,” your lender will use that amount when calculating DTI. If your credit report does not show you making student loan payments, the lender calculates DTI based on “1 percent of your remaining student loan balance.”
“Good Debt” vs. “Bad Debt”
Unlike credit card debt, student loans are usually considered “good debt.” Lisa Smith explains the difference between good debt and bad debt in her Debt Management Guide for Investopedia. In short, Smith defines good debt as debt that “has the potential to increase your net worth or enhance your life in an important way.” Under this definition, a mortgage, a business loan or student loans would be considered “good debt.” On the other hand, “bad debt involves borrowing money to purchase rapidly depreciating assets or only for the purpose of consumption.” A high-interest car loan and credit card debt are both considered “bad debt.”
However, Smith notes that the line between good and bad debt “sometimes depends on an individual’s financial situation.” A financial institution might view your student loans as “bad debt” if the terms are less than desirable — e.g. a high interest rate or higher than average balance. If your student loans are in collections, or you have defaulted on your monthly payment, lenders might reject your application. This is especially true for VA, USDA and FHA loans. The Turbo Finance article “Can You Get a Mortgage with Collections?” from June 2021 explains.
According to Turbo Finance, “federal student loan debt is not dischargeable and does not have a statute of limitations.” As such, an FHA loan will not be approved “for anyone with defaulted student loans.” However, private loans in collections are treated differently. According to the Federal Housing Administration Lenders resource “Can I Get an FHA Loan with Medical Collections,” you will not need “to pay any non-medical collections that are on your credit report if their combined total is less than $2,000.” Student loans in collections will still be included in your DTI — especially if you continue to make monthly payments to cover the debt.