Your student loan debt is deferred, so out of sight, out of mind right? Wrong, especially if you’re looking to purchase or refinance a home. Many students and recent grads don’t know how student loan debt can affect them when it comes to making a major purchase. Sure, not having to make payments on a huge chunk of debt right away is great, but will it hold you back in the long run? When it comes to qualifying for a mortgage, those student loan balances (especially the deferred amounts) can come back to haunt you when you’re least expecting it.
The real shocker is the way lenders are required to calculate your student loan balances vs. the payments that you thought were going to count as $0 per month.
Here are some home buying solutions for student loan debt if you are one of the millions of Americans faced with this uphill battle:
- Make sure your mortgage lender pre-approves you by including the deferred student loan debt in your qualifying DTI. You will get an estimate of the mortgage payment you can afford with your student loan debt.
- Get a Co-signer – applying for a mortgage with a co-signer does not mean they have to live with you! Knowing you need a co-signer in the beginning is much better than making a last-minute call to Mom & Dad a few weeks before you’re supposed to close.
- Get an income-based repayment plan (IBR) – this must be initiated prior to application for a home loan however keep in mind that FHA loans will not accept income based repayment plans unless it meets their standard guideline.
- Looking to refinance? Take advantage of the Student Loan Cash-out refinance! This allows for better interest rates than a standard cash-out refinance.
Curious how student loan payments are determined? We’ve laid it out for you below, depending on the type of mortgage loan you’re trying to qualify for.
FHA Guidelines for Student Loan Debt:
FHA offers enticing loan programs for people looking for a low down payment and relaxed guidelines compared to other loan types. You have a good FICO score, maybe a car payment but little or no credit card debt, and have saved enough money for a small down payment– you’re the perfect scenario, right? Not so fast, you forgot about that $40K in deferred student loans! Even though you don’t pay towards your balance(s) just yet, mortgage lenders are required to factor some kind of payment towards your monthly obligations to calculate the ever-dreaded DTI (Debt-to-Income) ratios.
Trust us, this is important for both you and the lender to ensure you can actually pay your mortgage once those student loans are out of deferment and need to be repaid.
To qualify for an FHA loan, Mortgage lenders “must use either the greater of 1 percent of the outstanding balance on the loan (deferred included), OR the monthly payment reported on the Borrowers credit report, OR the actual documented payment, provided the payment will fully amortize the loan over its term.”
The average cost of a 4-year degree, in-state tuition plus room and board, is $20,770.
$20,770 x 1% = $207.70
While $207 doesn’t seem that bad, the extra amount plus other debts, such as car payments, credit cards, etc., divided by your income can easily increase your debt-to-income ratio. While you may have the perfect scenario for an FHA loan, depending on the amount of monthly student loan payments, your DTI can suddenly become out of range and cause you to not qualify.
Conventional Guidelines for Deferred Student Loan Debt:
Conventional loan products are among the most popular home loans available. There are many conventional loan types with low down payments, but they usually come with more restrictive guidelines to qualify, like a tighter DTI requirement. There is a bright side though: Conventional loans require mortgage lenders to count the actual payment reflected on your credit report (even if they are less than 1%), OR 1% of the balance if they are deferred as the monthly payment(s).
Buying a home with student loan debt? Contact Platinum today to make sure you’re on the right path to being approved for a mortgage.
👩💼 Jessica Brown