Qualifying for a Mortgage with Student Loans
Student Loan Payments
The biggest challenge with student loans is that they are often deferred while you are in school.
While your loans are deferred or in forbearance they continue to accrue interest and grow as you add one loan after another while you are still in school working on your degree.
Not making payments on your student loans sounds like a great idea until you start paying them back. And then reality kicks in.
If your student loans are still deferred, in forbearance, on an income based repayment plan, or if you are on the Public Service Forgiveness Program (PSLF), getting approved for a home mortgage is not going to be easy.
Mortgage Qualifying Changes
In the spring/summer of 2016, changes were made regarding the treatment of student loans that were deferred, in forbearance, or on an income based repayment plan that would turn many homebuyers prospects upside down.
These new qualifying guidelines would prevent lenders from excluding deferred or forbearance loans from the loan to value calculation that determines how much you can qualify for when buying a home.
Your debt to income ratio is the percentage of your new housing payment and monthly debt, as a percentage of your gross monthly income before taxes.
Prior to 2016, when your student loan is deferred or in forbearance, your lender could ignore deferred loans, or loans that were deferred for more than 12 months from the closing of the home loan.
The new underwriting guidelines no longer allow a lender to ignore any student loan that is deferred, in forbearance, or that has a payment reported on the credit report that was not fully amortized to pay off at the end of the loan term.
In 2017, these guidelines were changed to make it easier to qualify for a mortgage if you have student loans.
2017 Student Loan Guidelines
In 2017, some of the student loan payment guidelines have been changed to make it easier to qualify for a mortgage with income based payments.
Depending on what kind of loan you are applying for, the way that deferred, and income based student loan payments are calculated will vary.
Here’s a quick overview of the underwriting guidelines for each traditional loan type:
Deferred and Forbearance Loans – Use statement from student loan lender stating what fully amortized payment would be, or use 1% of the balance of the loan. For Fannie Mae conventional loans, you can use an amortization formula for determining the payment.
Income Based Repayment Programs – Includes IBR, PAYE, REPAYE and PSLF programs. You may use the payment that shows up on the credit report, or a statement from the lender as long as the loan is not deferred or in forbearance. Zero payment is ok.
FHA & USDA Guaranteed Mortgage
Deferred and Forbearance Loans – Use statement from student loan lender stating what fully amortized payment would be, or use 1% of the balance of the loan.
Income Based Repayment Programs – Includes IBR, PAYE, REPAYE and PSLF programs. You must use 1% of the loan balance as the payment for your debt to income calculation.
VA Guaranteed Mortgage
Deferred and Forbearance Loans – You may ignore the student loan with documentation that shows that payments are deferred for at least 12 months from the date of the close of the loan.
Income Based Repayment Programs – Includes IBR, PAYE, REPAYE and PSLF programs. VA does not have well documented guidelines regarding income based repayment plans. Most lenders will use a calculation of 5% of the loan balance, divided by 12. I have also heard that some lenders will use an IBR payment as reported on your credit report.
Eliminate Deferred Student Loans
I often see young couples, and sometimes not so young, that are still strapped with student debt. Even if you get a great job after college, the monthly payments on your loans can severely reduce your qualifying income.
In most cases, the payments on these student loans all but eliminate the ability of former students to buy the home of their dreams, or any reasonably priced house in today’s market.
In all cases, if you can eliminate your student debt before shopping for a home, you will find that your home buying options are much greater, and your purchasing power will go much further.
Here are 3 creative ways to eliminate deferred student loans.
Gifts From Parents
A common strategy for many new homebuyers is to ask your parents for the money for a down payment on a new home.
While this is a great idea, and a very generous offer, the impact on your purchasing power can be greatly diminished when your lender begins to calculate your debt to income ratio including your student loan payments.
Instead of asking parents for a down payment, ask your parents to pay off your student loans! This will go so much further than using that same money for a down payment on a home.
Wedding Gifts are Overrated
Newlyweds? Instead of a bridal registry, take up a collection to pay off your student loan debt. This is the best wedding gift anyone that loves you can offer!
In the past few years, I’ve seen many creative strategies for repurposing the concept of the wedding gift into ways to raise money for the down payment of your first home.
Instead of simply getting into the home, paying off your student debt will provide you with much greater monthly cash-flow and make your new life that much better.
Preparing to Buy
If you know you are going to buy a home in the next few years, add paying off your student loan debt to your purposeful plan.
Many aspiring homeowners focus all of their time and energy to saving up for a larger down payment, I’m saying this is doing it completely backwards.
You are better off focusing on reducing your monthly expenses, not reducing your purchase money loan amount. Start paying off the smallest balances and highest interest rate loans first.
Student Loan Questions Answered
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