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Should You Refinance Your Student Loans Before a Mortgage Application?

July 13, 2022

If you’re among the 46 million Americans who have student loans, this debt could affect your ability to qualify for a mortgage. If you plan to buy a home in the coming months, you may wonder if refinancing costly student loans will make you more attractive to mortgage lenders.

In this guide, I’ll answer your questions about the best way to buy a home with student debt.

How Does Student Loan Refinancing Work?

When you refinance your student loans, you obtain another loan for the amount of your existing debt. Ideally, the new loan will have a better interest rate so you can save money on your monthly payments. You can also change your loan term to help you meet your financial goals. For example, you can extend your loan term to further lower your payments or shorten the term to pay less in interest over the life of the loan.

If you’re considering refinancing your student loans and want to check what rates and terms you could qualify for, there’s an easy way to do that. You can fill out the application form on Credible to compare offers from multiple lenders side by side. There’s no commitment and it doesn’t affect your credit score.

Check Your Rates on Credible

How Refinancing Your Student Loans Could Affect Your Ability to Buy a House?

Student loans play a role in your debt-to-income ratio (DTI). Lenders use this metric to make sure you can repay a new loan. To find your DTI, you divide your monthly debt payments by your pre-tax monthly income. Depending on the type of loan, you probably need a DTI of less than 43% for lender approval. Some lenders require DTI below 36%.

To look at a simplified example, let’s say you earn $3,000 a month. You have a student loan payment of $900 and credit card payments of $600. The resulting DTI of 50% disqualifies you for a mortgage. If you refinance your student loan to $600 or less, you improve your chances of home loan approval. You now have a DTI of 40%.

On the other hand, your credit score may temporarily decrease after refinancing student loans. Lenders typically check your score when you apply for credit, a process called a “hard” credit pull. Too many hard checks in a short time has a negative impact.

For best results, check your rates on a site like Credible, that lets you prequalify with a “soft” check, which doesn’t affect your score. You may also want to refinance at least a few months before you start the mortgage process to give your credit a chance to rebound if necessary.

Check Your Rates on Credible

Pros and Cons of Refinancing Your Student Loans Before Taking Out a Mortgage

If you have a high DTI, a pre-mortgage student loan refinance can boost your odds of approval. Lowering your monthly debt can also free up money for your down payment and closing costs, both important aspects of getting a mortgage.

You may also get a better student loan refinance rate before a mortgage than after you close on a home. Having a home loan will increase your DTI, which raises red flags for student loan refinance companies. While refinancing your student loans before you get a mortgage can lower your credit score, you can usually counteract the negative impact of a hard credit check with a few months of on-time payments.

You should also avoid refinancing your student loans or making any other money moves after you start the mortgage process. New information on your credit report can delay your home loan closing because you will have to go back through underwriting.

Why Deferring Your Student Loans Doesn’t Work?

Deferring your student loans won’t necessarily prevent you from getting a home loan. However, unlike refinancing, it won’t help you qualify by lowering your DTI.

Mortgage lenders still factor in deferred student loans when calculating your ability to repay. In fact, they use either 0.5% or 1% of your total outstanding balance to estimate a post-deferment monthly payment. This amount could even be higher than your actual monthly payment.

When Should You Refinance Your Student Loans?

Timing could have a dramatic impact on your refinance interest rate. This March marks the first of three planned interest rate increases by the Federal Reserve. After the new rate takes effect, borrowers will pay higher APRs across the board.

4 Steps to Get a Student Loan Refinance

Follow this easy process to refinance student loans for a lower monthly payment:

  • Obtain quotes from several different lenders to find the most affordable rates. Credible makes the process of shopping around easy by instantly connecting you with a network of trustworthy student loan refinancing companies.
  • Select the lender with the most favorable interest rate and terms. In addition to a low APR, you may want to consider customer service options, reputation, and fees such as prepayment penalties.
  • Complete your final application. You will need to provide documentation such as proof of income, statements for your existing student loans, and proof of identity and citizenship.
  • The lender will verify your information and provide final approval. Most refinance companies pay off your current lenders directly. Then, you make your monthly payments toward the new loan.

The process can take from a few days to a few months depending on the lender you select.

Check Your Rates on Credible

What Can You Do If You Don’t Meet the Requirements for Student Loan Refinancing?

Most student loan providers, including Credible, allow you to apply with a cosigner. As long as that person has good credit and meets the other requirements, you can obtain a cosigned refinance loan. Many lenders offer an automatic cosigner release after several years of on-time payments.

The Best Lenders for Student Loan Refinancing

If you want to refinance your student loans before interest rates increase, start your search with one of our top three recommended lenders.

1. Credible

It’s easy to shop around for the best APRs with Credible, where you can get instant student loan refinancing quotes from more than a dozen lenders without affecting your credit score.

Rates start at just 1.74%, and you qualify for a $200 bonus if you find a lower APR elsewhere. If you’re eligible to refinance your student loans with Credible, you can get final approval in a single business day.

Check Your Rates on Credible

2. Splash Financial

This student loan refinance network providers free quotes in minutes without performing a hard credit check.

Splash Financial’s partners never charge application fees, origination fees, or prepayment penalties on their loans. They strive to offer you the lowest available rates, with special programs for medical and dental residents.

Check Your Rates with Splash Financial

3. Citizens Bank

You can get variable student loan rates as low as 1.99% APR when you refinance with Citizens Bank. You might even save thousands a year on average with special programs like a 0.50% APR loyalty discount.

The lender offers quotes in seconds to refinance at least $10,000 in eligible student loans, with impressive maximums of up to $300,000 for a bachelor’s degree, $500,000 for a graduate degree, and $750,000 for a professional degree.

Check Your Rates with Citizens Bank

The Bottom Line

You may be able to benefit from refinancing your payments before applying for a mortgage. However, you should carefully review your individual situation when deciding the best route to meet your financial goals.

If you do decide to refinance, it’s an excellent time to save. After March 2022, an increase in the federal interest rate will drive up the cost of both student loans and mortgages.

You can use Credible to help identify the lowest possible rates for a student loan refinance with no impact on your credit score.

Check Your Rates on Credible

FAQ

Do student loans affect preapproval for mortgage?

Just like other types of debt, student loans factor into mortgage preapproval. Higher monthly student loan payments result in a higher DTI, which could prevent you from qualifying for a home loan. However, simply having student loans does not necessarily impact your chances of getting a mortgage.

Does a student loan count as income for a mortgage application?

A student loan counts as debt for a mortgage application, not as income. To calculate your debt to income ratio, add up all your monthly debt payments including your student loan. Divide it by your monthly income before taxes and convert the answer to a percentage.

Can you buy a house if your student loans are deferred?

You can potentially purchase a home with deferred student loans. However, the lender uses estimated payments toward your DTI, so the deferred loan still counts as debt. Most companies multiply your total deferred loan balance by either 0.5% or 1% to determine your post-deferment payment. For example, if you have $100,000 in deferred student loans the estimated debt would be $500 to $1,000 per month.

Is this a good time to refinance my student loans?

Yes, you should definitely think about refinancing your student loans if you want to save on your monthly payments. The Federal Reserve will raise interest rates in March 2022, followed by two additional increases in the coming months. The sooner you refinance your student loans, the lower your interest rate will likely be.

Andrea Miller
Written by
Andrea Miller has been a writer and editor for more than two decades. She has previously covered financial topics for Solvable, Kabbage, and Credit.com. Outside of work, she spends most of her time with her husband, daughter, and son and enjoys hiking, yoga, and reading.