Mortgages

How Student Loans Can Hurt Your Mortgage Application

Comments 7 Comments

Anyone who has tried to apply for a mortgage and had student loans knows what it’s like to be scrutinized and questioned by the mortgage company over the impact of those obligations. Like other forms of debt, such as car loans or credit cards, student loans are in the same classification: debt made against income or rather an ability to repay. Just like all consumer debts, student loans can reduce the ability to borrow because they erode income. So let’s take a closer look at how your student loans can hurt your mortgage application, and what you can do to protect yourself.

Quick Life-Cycle — Student Loan To Home Loan

Student loans are reported on a credit report just as any other payment obligation. In many instances, the student loan payments are deferred, extended out into a future date when the payments kick-in– if they have not already. Lenders are required by law to account for all material debt known to them in the supporting documentation a borrower provides in anticipation of acquiring a home loan. Student loans are the wildcard because they can show a payment at $50 per month on an obligation all the way up through $100 per month and higher. It’s not so much the monthly payment per student loan that lenders have to overcome, but in most cases it’s multiple student loans with multiple lenders, each showing a payment anywhere between $50-$80 per month.

For example, a consumer’s credit report might show six separate student loans totaling $50,000, each with a payment of $80 per month. That translates to a $480 per month obligation, which can reduce borrowing power by upwards of $60,000!

Let’s look at the path for a student loan borrower who’s trying to buy a house:

  1. Consumer decides to take out various large student loans in excess of $50,000 (average amount) to pay for college tuition.
  2. Finishes college in hopes to land an occupation with the expectation of earning an income large enough to afford  student loan payments and a housing payment.
  3. Enter: Decision to buy a house.
  4. Consumer takes the next step: Speaks with a mortgage lender about purchasing a house.
  5. Student loan(s) resurface into financial picture negatively affecting purchasing power.
  6. Consumer’s expectation of purchase price becomes “subject to change” based upon all liability payments.
  7. Consumer purchases a house with student loan payments counted for and makes timely repayments of principal and interest on both mortgage and student loans.

How To Keep Your Mortgage Application From Being Denied

If a student hopes to someday buy a home, he or she would be well advised to avoid private lenders when obtaining a student loan. Private lenders charge significantly higher rates of interest and can contain shorter-term amortizations inflating the payment obligation, which is what the mortgage lender will use when trying to qualify you for a home loan.

Further tips:

  • If you have multiple student loans, consolidate them into one loan to reduce total student loan payments (speak to a lender first).
  • If student loans are consolidated and they don’t report that way on the credit report, the lender has to use the information they have showing the higher payments because that’s what the credit report reveals, unless further supporting documentation can be provided to show each loan has been consolidated into one new debt.
  • Avoid any student loan delinquencies, especially in the last 12 months. Ignoring this could result in your application being denied for a government loan. Government programs are strict about delinquencies on federal debt, which is what a student loan is.
  • If student loans report as deferred on your credit report, get the specific payment amounts from the servicer or a payment letter from the servicer stating an approximation of what the payments will be when they come due and payable.
  • If a payment letter cannot be obtained, the lender will use 2% of the principle balance to determine appropriate payment obligation for qualifying.
  • If any student loans are paid off in full, but your credit report shows there is a current payment obligation, provide supporting documentation showing that it has been paid off in full to the mortgage company.

*Credit Caveat — if a student loan is in deferment for 12 months or longer, only on an FHA Loan can the payment be omitted from the lender’s qualifying ratios. Qualifying ratios are used by the lender to determine your ability to borrow.

Qualifying for a Mortgage Out of College

If you are a former student, and have a limited work history and student loan debt, you can still potentially qualify for a home loan if your field of study was in direct relationship to your field of of employment. For example, you have a degree in accounting and you’ve recently taken a job as an accountant.

Furthermore, if you were previously a full-time student, and you were not required to file a federal income tax return, you can still qualify for financing as you were not required to file IRS tax returns.

Image: iStockphoto

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  • Cody

    I have the same question!

  • ScottSheldonLoans

    Charlie,

    Thanks for the feedback. The point of the article was to share the impact student loans have on borrowing power. I agree, a further article about the relationship between debt, rates and PMI would be an excellent piece.As for your numbers, on a conventional loan can be petitioned to be removed after 24 months and 20% equity in the property.

  • ScottSheldonLoans

    The minimum payments on these student loans as reported on the credit report is what numbers that will affect your debt debt ratio. For example a $100 student loan payment could translate into 15k more or less in house price.

  • ScottSheldonLoans

    Generally, taking out a student loan “after” the house is bought is ideal Why? Because its debt not yet occurred. Lender’s rely on current debt not future liabilities.

  • http://www.Credit.com/ Gerri Detweiler

    Tiffany – You need to talk with a lender to find out what your options are. If your husband quits his job now then you may have to qualify based on your income alone, particularly if he goes from being employed to self employed. I am not sure why you are hesitant to talk with a lender, but I recommend you find someone in the area where you hope to move. They can hopefully tell you what your prospects are, and if you are not ready to buy now can give you a game plan for the future.

  • http://www.Credit.com/ Gerri Detweiler

    Yes that’s a potential problem and certainly makes it tough for people who move. But people still do move and buy homes. You’ve got a combination of challenges here – not very high credit scores, low down payment and change in employment. So I do think talking with an experienced loan officer would be best for getting a game plan in place.

    • ScottSheldonLoans

      Agreed Geri! Tiffany any lender that makes you feel rejected, should be fired. A good lender will take an assessment of your overall financial picture and give you proactive action steps to take to get qualified in the future if it cannot get accomplished now. If you can consolidate your student loans so your total monthly payment is lower, that will improve borrowing power, a good financial move. The key here like Geri says is to sit down with the lender and go over all material aspects to your credit, debt, income and assets. Based on what you said, I would have them pay particular attention to the debt and how that debt would affect your ability to qualify. The lender’s job obviously is to make mortgages, but it’s also to give people suitable financial choices with regards to qualifying and that is critically important. So invest the time in doing the research now to sit down with the lender letting the lender now this is a longer-term project and you need some proactive TLC to manage those liabilities so you can successfully pull this off in the future. Good luck and let us know how it goes!

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