How will student debt impact my ability to buy an apartment in NYC?
- Your debt-to-income ratio can limit your capacity to get a low-interest mortgage
- Make your student loan payments on time to maintain your credit score
Your credit score, debt-to-income ratio, and other factors impact your ability to secure a mortgage.
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I’m hoping to buy a condo or co-op in New York City within the next year or so. I’m still making payments on a student loan from my undergrad days. How will my student debt affect my ability to buy?
Having student debt—or any debt—can limit your ability to secure a low-interest mortgage to buy an apartment in New York City. But there are a few steps you can take to improve your credit worthiness to a lender, according to our experts.
Student debt increases your debt-to-income ratio (DTI): the total of all your monthly expenses divided by your gross monthly income. Paying off your debt would be the best option but not everyone is in a position to do so. And don't count on help from the Biden student debt relief plan, at least for now. It has been temporarily blocked by a federal judge.
A bank will consider your monthly loan payments as part of your expenses when factoring your DTI, or, if your loans are in deferment or forbearance, they will often use 0.5 percent or 1 percent of the total loan amount instead, said Melissa Cohn, regional vice president at William Raveis Mortgage.
“Student loans are a part of the liabilities and obligations that every bank looks for in terms of qualifying a borrower,” Cohn said. A lot of people “don’t really understand that that monthly payment is going to count in terms of qualifying for a mortgage.”
Lenders will generally allow for a DTI ratio of up to 50 percent, but those with higher DTIs will often get stuck with worse loan terms. National Cooperative Bank, for example, has a DTI cap of 43 percent, said Tessa Gaines, a loan officer at the bank.
Plus, co-op boards have their own DTI requirements for buyers, usually around 22 or 24 percent. (For more on that, check out Brick Underground’s guide to DTI.)
Make your payments on time
Paying your student loan bills, and any other debts, will help increase your credit worthiness in a bank’s eyes. You can set up automatic payments to make sure you don’t miss a bill, said Jack Wallace, director of government relations at Yrefy, a private loan refinance company.
“Put whatever debt payments that you have—whether it's a car, a mortgage, a student loan, or a credit card—on a monthly automatic deduction,” Wallace said. “Then you ensure you’re not delinquent and don’t default. In turn, that will help your credit score.”
Most federal student loan borrowers saw their bills return in October 2023, after a pandemic-era pause on repayments. But some borrowers who haven’t yet made full, on-time payments have until Oct. 1st of this year before they could face delinquency or default if they fail to make their monthly payments, NerdWallet reported.
Late payments can make banks unwilling to lend to you and hurt your credit score, Gaines added. For example, NCB doesn't lend to borrowers if they have a payment that is more than 30 days late within the past year, she said.
Interest on federal student loans began accruing on Sept. 1st of last year, so if you haven’t started paying, you may owe more. Interest, however, won't accrue on loans of borrowers enrolled in the Saving on a Valuable Education plan; those loans are in forbearance as the U.S. Department of Education wades through the legal battle over its ability to implement the plan.
You could refinance or consolidate your student loans to lower your monthly payments, which would in turn lower your DTI. But refinancing means you’ll lose access to income-driven repayment plans—which are currently on pause amid ongoing legal challenges—loan forgiveness programs and other federal loan benefits, NerdWallet reported. And consolidating could extend your payment schedule.
Improve your credit score and start saving
You can also improve your credit score in other ways, by making your credit card payments on time, limiting your credit usage to no more than 30 percent of your monthly credit limit, and avoiding big purchases before you plan to close on a loan. On-time student loan payments will help maintain or even boost your score, Wallace said.
You’re probably already saving for a down payment, but make sure to budget for closing costs as well, including your broker’s commission, taxes, moving expenses, attorneys fees, and building fees. And if you need help qualifying for a loan when the time comes, you could always get a co-signer, such as a spouse or parent, Cohn said.
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