How Student Loan Refinancing Could Affect Your Mortgage Application

Though some grads put off a home purchase because of student loans, it’s certainly possible to buy a home when you have student debt.

However, you might need to approach your home purchase differently if you’re balancing student debt, too. Before you decide to apply for a mortgage, consider the impact of refinancing your student loans.

Depending on your situation, refinancing your student loans can either help or hurt your chances of getting approved for a home loan. Carefully consider your own circumstance before moving forward.

Does refinancing hurt your credit?

Because your credit is the first thing mortgage lenders look at, make sure that refinancing your student loans won’t hurt your chances.

“A refinanced student loan will appear as new debt on a credit report and could have a negative impact on the buyer’s credit score in the short-term,” said Ken Pederson of Fairway Mortgage in Lancaster, Pennsylvania. “Lower credit scores can impact interest rates on their mortgage, the cost of private mortgage insurance, and even the ability to qualify for a home mortgage.”

If you plan to buy a home in the next couple of months, “Sit tight, buy your home, and refinance after the settlement,” Pederson said.

However, that new credit probably won’t cause mortgage problems in the long run. Once you start making regular payments, the effect becomes positive.

“For homebuyers with a longer timeframe before purchasing, go ahead and make the move, assuming the refinance will lower the payment,” continued Pederson.

Student loan refinancing can help you buy a home

In some cases, planning to refinance your student loans first can improve your ability to buy a home.

Dan Green, a 14-year veteran of the mortgage business and founder of Growella, thinks homebuyers can come out ahead by refinancing student loans first.

“Refinancing student loans reduces your monthly obligations, which lowers your debt-to-income ratio,” Green said. With less of your monthly income going toward debt repayment, your numbers look better — especially in terms of the 28/36 qualifying ratio. You can present yourself in an improved light by refinancing first.

On top of that, you might increase the size of your mortgage. “The advantage of refinancing your student loans prior to making a mortgage application is that you can increase your maximum mortgage loan size,” said Green. “If that’s unimportant to you or unnecessary, the order of transactions won’t matter.”

“At today’s mortgage rates, every dollar you save on a student loan refinance raises your maximum mortgage size by $210,” he said.

Pay attention to the home loan program

Before you take the plunge, Pederson suggested discussing your options with a loan officer. Depending on the lender and the loan program, their view of student loans might be slightly different.

A conventional mortgage might have slightly different underwriting requirements related to student loans than an FHA loan, VA loan, or USDA loan. “All these programs have slightly different viewpoints on how lenders should look at student loans, especially if they are in deferment,” said Pederson.

Talking to a loan officer or mortgage broker can give you an idea of your options. Plus, a broker can help you navigate the realities of student loans, refinancing, and buying a home.

The same applies if you hope to use grants to help you with your down payment. Talk to someone knowledgeable about the options as you make your choice.

Don’t refinance your student loans while a mortgage is pending

It’s perfectly acceptable to refinance your student loans before or after closing on a home. But you should never begin the process while the mortgage is pending.

Have you already started the mortgage process? Even if you’re approved and the home is under contract, don’t refinance your student loans.

“Every lender has to check credit again, just before settlement,” said Pederson. “If we see any new inquiries or loans, this new information has to be researched and can cause the file to go back into processing and underwriting.”

Applying to refinance your student loans while your mortgage is pending could put your home purchase at risk.

A mortgage could impact your chance to refinance student loans

Depending on the situation, your mortgage could impact your ability to refinance your student loans. A high debt-to-income ratio could result in a rejected refinancing application. Your mortgage adds to your debts. If your income isn’t high enough to absorb that debt and provide a buffer, it could cause problems for your student loan refinance.

Make your mortgage payments on time and it shouldn’t hinder you from getting a student loan refinance. In fact, after a few months of on-time payments, you should see an improvement in your credit score.

Student loan refinancing and buying a home

It’s not a huge deal whether you refinance your student loans before or after you buy a home. The biggest impact comes from whether or not your debt-to-income ratio is holding you back.

In that case, refinancing can lower your monthly payments enough to allow you to qualify for your home.

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