Should You Refinance Student Loans Before Buying a House?

Q: Does refinancing student loans affect buying a house?

Lenders looking at you and deciding about a mortgage like to see a certain debt to income ratio. If you’re paying a large monthly student loan, that could make it hard to achieve that desirable ratio. Refinancing might give you a lower monthly payment and better your chances.

Q: Can student loans keep you from buying a house?

When you’re considering refinancing student loans, you need to know that taking out the loan might lower your credit score just when you want to show the highest possible score to mortgage lenders. The credit score dip might stay on your report with credit agencies for several months. However, after that it typical returns to your pre-credit check number, and making regular on-time payments on your refinanced loan could then help your score more. So buying a house with student loans revolves around finding the best timing for you.

Q: Does consolidating student loans help with mortgage?

If you have federal student loans, you have the option to combine all or some of your federal student loans into a federal Direct Loan Consolidation. This will make it easier to keep track of your payments, though it won’t directly help with the mortgage. If you consolidate with a private loan refinancing, you might be able to obtain lower interest and so lower your monthly payments and be in a better position for the mortgage application. But you will no longer qualify for federal loan forgiveness programs.

Refinancing Student Loans Before Buying a House

Nancy BilyeauUpdated August 2, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Refinancing your student loans before you apply for a mortgage could put you in a better financial position—but only if the timing is right and the loan terms are advantageous, say finance advisers.Learn about the connection between refinancing a student loan and applying for a mortgage.

Buying a House With Student Loans

The burden of student loan debt on young people has become a sore point, particularly in the political arena. In November 2020, when he was president-elect, Biden said that student debt “is holding people up. They're in real trouble. They're having to make choices between paying their student loan and paying the rent."The challenge in buying a home while paying down student loans can be particularly frustrating.

Long-Term Debt

The size of the nation’s student loan debt is staggering: About 45 million Americans owe nearly $1.7 trillion in student loan debt.The average federal student loan debt is $36,510 per borrower and private student loan debt averages $54,921 per borrower, according to recent data from Educationdata.org. What makes this a burning issue for home buying is how long people are taking to pay off student loans.The average student-loan debt holder takes 20 years to pay off what’s owed. Some professional graduates take more than 45 years to repay their student loans. Recommended: Average Student Loan Debt 2023

Debt to Income Ratio

The formula that brings this into focus is the Debt to Income Ratio (DTI), one of the most important factors that lenders consider. DTI is your monthly debt payments, divided by your monthly gross income. The DTI typically includes monthly debt payments such as student loans and other types of loans, rent, mortgage, credit cards, car payments, and any other debt.The average monthly student loan payment is an estimated $460, according to recent records of Educationdata.org. This could give you a higher DTI.The challenge: Borrowers with a low DTI receive better interest rates and are more likely to be approved for a mortgage, while those with a high DTI may be denied or charged a higher interest rate on the mortgage.

Should I Refinance Student Loans Before Applying to Buy a Home?

Different tactics are employed to make it easier for someone paying down student loans to buy a home.Lawmakers in Maine are working on a bill that would forgive up to $40,000 worth of student loan debt for eligible first-time homebuyers. Maine Smart Buy is modeled after similar existing programs in Illinois and Maryland.For those who can’t turn to such state-government forgiveness programs, one much-discussed strategy is refinancing student loans with a private lender. People find it worth refinancing their student loans for a variety of reasons.When you refinance, the private lender buys the government loan and issues a new loan. If you have a good credit rating, you might be able to obtain a loan with a lower student loan interest rate.Another question you may have: “Should I consolidate my student loans before buying a house?” As with the refinancing student loans strategy, the goal is lower payments to help make room in your budget for a mortgage. Consolidating debt may help you get there — but it may not.

Pros of Refinancing Before Buying a House

Refinancing could lower your monthly payments so that you have a better shot at getting a mortgage.When you refinance student loans, the private lender basically buys your government loan and issues a new loan. If you have a good credit rating and income history, you might be able to obtain a loan with a lower interest rate. If you choose a fixed rate loan, you could lock in the lower interest. That means you pay less every month. Or you could change the term to extend the life of the loan in order to pay less.Another benefit of lowering your DTI ratio by reducing your monthly student loan payment is that way you could be preapproved for a larger mortgage amount.And if you are paying less every month on your student loan, you’ll have more money for your down payment and for remodeling the new house.

Cons of Refinancing Before Buying a House

Not every refinanced loan is advantageous. If you are unable to obtain a good deal on a refinanced student loan, it will not help you with paying down your loans, and it won’t help you get the mortgage you want either.But even if you have excellent credit, there’s a problem. A downside to refinancing is that your credit rating will dip. And this is the time when you need the strongest credit rating possible to get a good mortgage. This credit rating drop is part of applying for any kind of loan. The lender does a “hard check” on your credit and financial record as part of evaluating you for the loan, inserting some instability into your profile.Usually, a new hard inquiry on your credit report and a new line of credit can be mitigated in a fairly short period of time. This is why some financial experts advise waiting at least six months after you refinance to apply for a mortgage. By that time, the effect of the hard check should be gone.Also remember that if you refinance your student loan to get a longer term on the loan, and thus a lower monthly payment, you might pay more interest in the long run.Finally, if you refinance with a private lender, you will no longer qualify for any government forbearance or income-driven plans for that amount of the loan.

The Takeaway

Student loan payments can make it harder to find room in your budget for house payments. Mortgage lenders might not like seeing the debt you are carrying, sometimes for years to come. So buying a house with student loans can be a challenge.If you refinance your federal student loans, you might be able to lower your monthly payments and so make a stronger case for the mortgage you want. But be aware of timing issues: When a lender evaluates you for a refinanced loan, you’ll usually get a temporary dip in your credit rating because of the hard check.When refinancing student loans, you can compare rates through Lantern by SoFi.

Frequently Asked Questions

Does refinancing student loans affect buying a house?

Can student loans keep you from buying a house?

Does consolidating student loans help with mortgage?

Photo credit: iStock/Sezeryadigar

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About the Author

Nancy Bilyeau

Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for Lantern. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.

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