Do Student Loans Affect a Mortgage Application?

I'm in my early twenties and I'm thinking about buying a house. I don't have any credit-card debt, but I owe about $20,000 in student loans. Will that hurt my chances of getting a mortgage?

Not necessarily. When you apply for a mortgage, lenders don't just look at how much you owe; your income is also a factor.

Mortgage lenders traditionally follow what's known as the 28/36 rule: No more than 28% of your monthly gross income should be dedicated to your mortgage payment, property taxes and insurance. And your total debt payments should equal no more than 36% of your gross income.

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Two other factors are also important: The more money you put down, the less risk the lender takes on and the more likely you are to get a mortgage. Especially in today's market, in which lenders are looking for squeaky-clean borrowers, a bigger down payment makes you more attractive.

And, of course, lenders look at your credit score. Here, too, your student loans could have an effect -- but not necessarily negative. When credit scores are calculated, student-loan debt is viewed more favorably than credit-card debt.

That's because the FICO score, which most lenders use, divides debt into two categories: installment loans and revolving loans. Student loans, mortgages and car loans -- which require you to pay a fixed amount every month -- are installment loans. Credit cards -- which let you control your monthly payments -- are revolving loans.

Owing a lot of money in installment debt isn't going to hurt your credit score as much as maxing out your credit cards.

Nevertheless, young adults often get themselves into trouble with their student loans, either because they can't afford to make the payments or simply elect not to. But new grads typically build their credit history based on a credit card or two plus student loans, so it's important not to fall behind. If you're struggling to pay off your federal Stafford loans, you have several options:

If you can't find a full-time job or you experience some other kind of economic hardship, buy time by asking your lender about deferring your loan repayment.
If you're working for peanuts, you can lower your payments by stretching out the loan term or basing your payments on your income. (See How to Pay Off Student Loans.)

A bill just passed by Congress would phase in repayment terms that are even more generous for borrowers who need help. See A Break on College Costs for more information.

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.