Thursday, May 4, 2017

How Student Loans Affect Getting A Mortgage When Buying A Home

One topic that has been highly discussed in the mortgage and real estate industry are student loans.  If you’re trying to buy a home and have student loan debts, you’ve likely experienced a high level of scrutiny from mortgage lenders and have had to answer several questions.
Student loans are similar to other types of debts, such as a car loan or credit card debts, in the sense that they can dramatically impact the amount a lender is willing to allow a borrower to have.  There are many frequently asked questions about mortgages and it’s vital that if you have student loans, you ask a mortgage professional how they can impact your ability to qualify for a mortgage.
If you’re going to be buying a home and have student loans, make sure you read on to find out how student loans affect getting a mortgage.  Below you will find out how student loans impact mortgage lending, how student loans affect specific types of mortgages, and other helpful information.

How Student Loans Impact Mortgage Lending

Student loans have been making it difficult for many buyers to get a mortgage to buy a home.  This is the case especially with many millennial home buyers.  The pressure on millennials to go to college and obtain a degree is higher than ever.  This is leading to significant student loan debts and is having a huge impact on their ability to buy a home.
Certainly a buyer must have solid employment history, a strong credit score, decent income, and some assets, but a lender is also going to review a buyers debt to income ratios to make sure they are within the programs guidelines. The biggest impact that student loans are making on mortgage lending is that they must be included in a buyers monthly debts.  The percentage or dollar amount of student loans that must be included in a buyers monthly debt does vary depending on the type of mortgage they are attempting to secure, which will be covered below.
For example, to understand how student loans impact a buyers debt to income ratio, imagine a buyer has a monthly income of $3,000.  This buyer has monthly debts of $500 prior to their student loans, which would give this buyer a debt to income ratio of roughly 16%, which is very good.  If a buyer has another $500 in monthly student loan debt, this brings their total monthly debts to $1,000 which also raises their debt to income ratio to roughly 33%, which does not leave a lot of room to factor in a monthly mortgage.

Student Loan Repayment

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There is no secret that student loan payments are important and not paying them on time can be a big reason why a mortgage is denied.  Since many student loans are backed by government agencies, if you were to apply for a government backed mortgage and there were delinquencies, the chances of getting approved for a mortgage are slim to none.
There are several student loan repayment plans that can be taken advantage of and each one can have an impact on specific types of mortgages.  Income driven repayment plans, income sensitive repayment plans, extended repayment plans, and graduated repayment plans are some of the most popular plans.  It’s important that if you’re going to be buying a home and have student loan debt that you consult with a mortgage professional to see which plan would be best without jeopardizing your ability to purchase a home.

How Do Student Loans Affect Specific Types Of Mortgages

There are lots of different types of mortgages that buyers have the ability to choose between.  It’s very important that when buying a home a buyer understands what type of mortgage is best for their individual situation.  Student loans may make a dramatic impact on deciding which type of mortgage is best for their situation because they affect different mortgage products differently.
Below you will find out how student loans affect specific types of mortgages.  As you decide which type of mortgage is the best for your situation, keep in mind if you have student loans what impact they may have.

Veterans Administration Loans (VA Loans)

Student loan debts have an impact on VA loans and it’s important that if you’re considering a VA loan to purchase a home, you understand the potential impact they can have on the chances of getting a loan.  Since student loans generally impact a potential borrowers debt to income ratio, VA loans have guidelines whether they will be counted towards a monthly debt to income ratio or not.
If a student loan payment is due within the first 12 months after closing, a lender will be required to include it in the monthly debt to income ratios.  Another scenario where student loans must be counted towards the debt to income ratios is when student loans are in forbearance or if they’ve been deferred due to a hardship.
If a loan has been in deferment for three years a lender can typically use zero towards a buyers monthly debt to income ratio.  Documentation is required in all cases, but if no documentation can be obtained, a lender will use a payment listed on the borrowers credit report or 5% of the balance of the student loans divided by 12.

United States Department of Agriculture Loans (USDA Loans)

USDA loans, traditionally, do not permit any type of deferred, income-based, or graduated payment scenarios.  Most lenders will require a documented fixed payment to be used in qualifications.  If a lender cannot obtain a documented fixed payment, USDA will require that 1% of the loan balance that is documented on the credit report as the monthly payment.  Even if there is a payment listed on the credit report, USDA requires that the payment listed is fixed.
If the proper documentation cannot be provided, a buyer who has to use 1% of the total student loan balance reported on the credit report, can be impacted severely.  For example, if the proper documentation cannot be provided and the credit report shows a total of $50,000 in student loan debt, the lender must use $500 towards the buyers USDA qualifying debt to income ratio.

Conventional Loans

Generally speaking, conventional loans have fairly flexible guidelines when it comes to mortgages.  The same can be said for student loans and their impact on conventional loans.
For conventional loans, the monthly payment amount for student loans used for qualifying can be any of the following;
  • Payment shown on credit report
  • If loan is deferred, 1% of the outstanding balance
  • Direct verification from the student loan provider
  • Documentation provided by the borrower confirming the actual payment

Federal Housing Administration Loans (FHA Loans)
FHA loans are one of the most popular types of loans, especially for first time home buyers.  Since so many first time home buyers utilize FHA loans, the guidelines for student loans are pretty strict.  Recent guidelines have been put into place for borrowers who are obtaining an FHA loan.
Regardless of the payments that are listed on a borrowers credit report or documentation of an income-based repayment/graduated payment, FHA requires that lenders use 1% of the outstanding balance on the credit report.  Even if a borrowers loans are in deferment, lenders must still use 1% of the outstanding balance towards monthly debt to income ratios.
Recently while selling a home in Houston, TX, a buyer was turned down at the last minute because the changes to the guidelines.  The buyer no longer was able to qualify for the property since FHA had to use 1% of the total outstanding balance in their qualifying ratios.

Tips For Getting A Mortgage To Buy A Home With Student Loans

Now that you’ve learned about the impact that student loans have on getting a mortgage to buy a home, don’t feel that the task is impossible.  With the proper preparation and following the correct tips, you can get a mortgage to buy a home even with student loans.
Below are some excellent tips for getting a mortgage to buy a home with student loans.
  1. Prepare – It’s recommended when buying a home, whether you have student loans or not, that you prepare.  If you’re buying a home and have student loan debts, it’s suggested to begin saving for a home at least 12 months in advance.  Buyers who have a larger amount of money saved will appeal to lenders much more than a borrower who is attempting to buy a home with little or no money and with student loans.
  2. Pay Off Debts – It’s not realistic to pay off student loan debts immediately after finishing up with school.  Paying off debts does not necessarily have to be the student loan debts.  Paying off small debts such as credit cards can make a big difference in a buyers monthly debt to income ratios.
  3. Reduce Living Expenses – A buyer who is able to reduce their living expenses, such as entertainment and dining, will be able to save money quicker than one who does not reduce their expenses.
  4. Avoid New Debts – Too many buyers who have student loans think it’s a great idea to add additional debts, which is completely false.  If you’re buying a home and have student loans, it’s highly recommended that you avoid all new debts.  This may mean waiting to buy a new car or get a new television.
  5. Improve Income – Everyone would love to get a huge raise at their job and make more money.  This isn’t always possible though, but there is nothing stopping you from getting a part time job to put more money in your pocket.

 Final Thoughts
Getting a mortgage while having student loan debts can be tricky, as you can see from the above information.  It’s important that if you’re buying a home and have student loans, that you understand how they impact the different types of mortgages.
It’s always best to get a mortgage pre-approval before shopping for homes, especially if you have student loan debts because they can significantly impact mortgage qualifying.  It’s recommended to consult with a top mortgage consultant about how your student loan debts may impact getting a mortgage when buying a home.

Other Top Mortgage & Home Buying Resources

Are you buying a home in the Houston area and have student loans? Wondering how they will impact your ability to purchase a home?  If you don’t have a top Houston, TX real estate agent or top Mortgage consultant yet, please contact me, and I’d love to help you get pre-approved for a mortgage to buy a home!  It’s critical that you have quality representation when making one of the biggest purchases that you will ever make.

About the authors: The above article  “How Student Loans Affect Getting A Mortgage When Buying A Home” was written by Andres Jones of the The Jones Team at Realm Real Estate Professionals.  With over 30 years combined experience, if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.

We service the following Greater Houston areas: Sugar Land, Missouri City, Katy, Cypress, Pearland, Spring, Stafford, Richmond, Rosenberg, Fulshear, Woodlands, Conroe, Humble, Kingwood, Crosby, Baytown, Beaumont, and Galveston, TX

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