Are student loans considered as debt when getting a HELOC?

If you’re thinking about getting a home equity line of credit (HELOC), but still have to pay off your student loans, you may be wondering if they’re considered debt. Keep reading to find out how lenders view your student loans when you apply for a HELOC, how HELOCs work, and financing alternatives if you don’t qualify for a HELOC.

Are student loans considered when getting a HELOC?

Although student loans are generally considered “good debt,” and have some differences from other loan types, they can still count against you when you apply for a HELOC or another loan product. Student loans are considered debt and impact your debt-to-income (DTI) ratio. Your DTI is the percentage of your monthly income that goes toward servicing any kind of debt, student loans included. 

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Whether you took out private student loans, federal loans, or a mix of both, they’re considered as debt when you apply for a HELOC. Lenders consider your DTI ratio before approving you for a HELOC or any other type of financing.

Does student debt count towards credit?

While student debt can work against you in a DTI calculation, it can still serve a useful purpose for your HELOC application. Because student debt is a form of installment debt, your monthly payments help build your credit score. If you’ve made all your student loan payments on time, they’ll contribute to a credit score that helps you qualify for the best rates on a variety of financial products. 

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Additionally, student loans add an additional type of loan to your credit report, which improves your credit mix. While having a variety of loans on your report is less important than timely payments and a low utilization rate, it can still help move the needle. 

How a HELOC works

A HELOC is a secured line of credit that uses your home as collateral. HELOCs come with two phases: a draw period and a repayment period. The draw period lasts 5-10 years while the repayment period lasts 10-20 years. During the draw period, you can borrow up to a certain amount and make interest-only payments. During the repayment period, you start to repay the amount you borrowed plus any remaining interest. Once the repayment period begins, you won’t be able to borrow more funds unless you refinance your HELOC into a new one. 

HELOC requirements

To qualify for a HELOC, you’ll need to meet your lender’s income, credit, and DTI requirements. Some lenders are more strict than others. However, many are willing to work with borrowers who don’t have the best qualifications if they’re willing to pay a higher interest rate. Although each HELOC lender has their own criteria, most lenders require the following from a borrower:

• 15-20% home equity 
• Credit score of at least 620
• Loan-to-value ratio (LTV) of 80% or less 
• Debt-to-income ratio (DTI) of 43% or less
• Acceptance of variable interest rate

HELOC alternatives

Borrowers with a substantial amount of debt in student loans are often unable to meet a lender’s DTI requirement of 43%, or less. If your DTI ratio is too high to qualify for a HELOC, there are a few other financing options to consider. 

Cash-out refinance 

A cash-out refinance replaces your mortgage with a new one that is greater than what you currently owe. When you refinance your mortgage, you’ll get a new interest rate and revised loan term. Borrowers often refinance when interest rates are low so they can secure a lower rate. 

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Although most lenders prefer a DTI ratio of 43% or less, some lenders will accept DTI ratios as high as 50% if you have a high credit score or if you’re refinancing through a government program, such as FHA or VA refinance. 

Home equity loan

A home equity loan allows homeowners to borrow a lump sum of money against the equity in their homes. Home equity loans require borrowers to start making monthly payments as soon as funds are disbursed and have loan terms of 5-20 years. 

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Home equity loan borrowers usually have to meet the same requirements as HELOC borrowers. In some cases, borrowers might be able to get a home equity loan with bad credit or a high DTI ratio. Local credit unions and online lenders are often willing to work with borrowers who don’t meet traditional lender criteria.

Home Equity Investment

A Home Equity Investment (HEI) from Point is a unique opportunity to tap into your home equity without taking on traditional debt. Borrowers receive a lump sum of cash in exchange for a percentage of their home’s future appreciation. 

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Unlike a HELOC or home equity loan, there are no monthly payments that need to be made immediately after funds are disbursed or in the repayment period. Instead, HEI borrowers settle their HEI when they sell or refinance their home within 30 years. 

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Additionally, there are no DTI requirements on a HEI. To qualify, borrowers need to have plenty of home equity and a decent credit score. Credit checks are not intense on a HEI as they are on other forms of home equity financing.

Frequently asked questions

Can I qualify for a HELOC with debt?

Yes, you can qualify for a HELOC with debt. However, whether or not you get approved depends on several factors such as the amount you’d like to borrow, how you plan to use the funds, and whether or not you’re willing to negotiate. Lenders will usually want you to reduce your DTI ratio before taking out additional debt. However, if the funds you’re seeking are for immediate use and you don’t have enough time to bring your DTI down, a lender might be willing to offer you a loan in exchange for a higher down payment, higher interest rate, or additional fees. 

Are student loans considered personal debt?

Student loans are considered personal debt, or consumer debt, if the funds were used for daily expenses such as rent, food, and transportation. However, if your student loans were spent primarily on tuition fees, they’d likely fall under non-consumer debt. The distinction between personal debt and non-consumer debt is relevant when filing for bankruptcy. The type of debt you attempt to discharge will dictate what type of bankruptcy you qualify for and how much of your debt can be discharged. 

Should you use a HELOC to consolidate student loans?

Using a HELOC to consolidate your student loans might be a good idea if rates are low and you’re absolutely sure you can keep up with monthly payments. A HELOC debt consolidation allows you to restructure your student loans into a single debt product. This can lower your monthly payments and reduce total interest paid. However, HELOCs use property as collateral, which means you could lose your house if you ever fall behind on payments. Carefully consider whether consolidating your student loans into a HELOC is worth the risk.

What should I avoid with a HELOC?

A HELOC is a powerful financial tool for homeowners. That being said, it’s not the best fit for all financial circumstances. If you cannot keep up with your HELOC payments, your home will be at risk. Here are a few things you should avoid with a HELOC in order to protect one of your most important assets: 

• Avoid using a HELOC to pay for discretionary expenses, such as vacations, weddings, or new car purchases. 
• If you are using a HELOC to consolidate credit card or personal loan debt, avoid building up new balances on those cards once your accounts have been paid off. 
• Stay on top of your HELOC payment schedule to avoid being surprised when your HELOC payments jump as a result of interest rate changes or the switch from the draw phase to repayment. 
• Avoid any late payments or other default events. Just as with your first mortgage, these can lead to foreclosure. 

Final thoughts on getting a HELOC with student loan debt

Getting a HELOC with student loan debt is possible. However, borrowers should consider how their DTI ratio can impact their chances of approval. If your DTI ratio is 43% or more, it might be more difficult to get a competitive rate. Keep in mind HELOCs come with variable rates, meaning they can fluctuate over the life of the loan. The lower you can get your rate, the better. 

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Borrowers can increase their chances of a lower rate on their HELOC if they pay off student loans or obtain student loan forgiveness before applying. However, if you don’t have time to lower your DTI ratio or don’t qualify for loan forgiveness, look for HELOC at a credit union or other non-traditional lender. 

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Get a HEI with Point instead of a HELOC. HEIs come with no monthly payments, flexible credit requirements, and no DTI checks. Explore Point’s HEIs here.